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st: first difference models: two questions
I am running a first differencing model and have two
1. For a dichotomous dummy variable, the difference
can be -1, 0 and 1. Instead of using this directly as
a regressor, is it econometrically correct to generate
three new dummy variables respectively for the three
categorized difference and use them as regressors
eg. instead of: \delta Y = \beta \delta X,
estimate: \delta Y = \beta1 Z2 + \beta2 Z3, where Z2=1
if \delta X==0 and Z3=1 if \delta X==1 (default is if
If yes, is there any paper or book chapter that can be
2. Dealing with age and year dummies. Since the
difference age is the same for all persons, it seems
meaningless to use (\delta age) as a regress (or does
it?) Is it correct to use individual age dummies to
control for cohort effects? Also, should year dummies
be included as well? Is there any paper or book
chapter that can be referred to in this regard?
Any information is highly appreciated.
Thank you very much in advance,
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