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re: RE: st: why reg3 dropped constant term ?

From   Christopher Baum <[email protected]>
To   <[email protected]>
Subject   re: RE: st: why reg3 dropped constant term ?
Date   Sun, 2 Jan 2011 15:39:59 -0500

For you first clarification about the year dummies, Yes, I have excluded y_1 =2000 as usually recommended in dummy variable coding.
I have 8years( 2000-2007) I code them as y_1 =2000 , y_2=2001 ...y_8=2007. In regression I excluded y_1 as base year.

For your last question, regarding my use of the first difference d.cbf and d.rwar. I have the following additional question:

I originally coded the time variable (time trend) as yid (y=year, id= Identifier). In my model when I used this Id= yid as the time or trend variable the constant term is included in reg3 output (not dropped), but when I code the yid as individual year dummies and included the full year dummies -1year (I mean I excluded y_1, and included the remaining y_2 to y_8 in the model) then reg3 will dropped the constant term (with the full 8year-1year dummies).

Note also that when I use only 4years then the constant term is not dropped in the model ( I mean when I split my 8year sample period into 2 4years sub-sample e,g when I use y_2, y_3,y_4, y_5 in this case the constant term is not dropped from reg3 output).

My question is: if there is a collinearity in my model is it between the year dummies and the constant term or with my other variables too? What I should do then in any of this cases?

Keep in mind that the first year will not be included in your regression in any case as you have differences and lags in the equation. I would suggest 

tab d.cbf if e(sample), by(year)

after doing an -ivregress 2sls- on the first equation. There must be something strange going on when you include years 2001-2007 in the estimation.

Think about the algebra: you surely do not want an explicit time trend in an equation in which the response variable is in differences! That would suggest, cet.par., that the average change in 2007 is seven times as large as it was in 2001!  For that matter, I doubt if you really want to include a time trend (which is what a constant term represents in that specification).


Kit Baum   |   Boston College Economics & DIW Berlin   |
                              An Introduction to Stata Programming  |
   An Introduction to Modern Econometrics Using Stata  |

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