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st: Clustered standard errors on the region * year level (-xtreg-)

From   "Tobias Pfaff" <[email protected]>
To   <[email protected]>
Subject   st: Clustered standard errors on the region * year level (-xtreg-)
Date   Fri, 16 Sep 2011 15:53:10 +0200


I do a fixed effects regression and wonder how I should cluster the standard

Dependent variable: individual level
Independent variables: individual level, GDP per capita on the regional
No. of regions: 10
No. of individuals: 30,000
No. of years: 26
No. of obs.: 304,000
Year dummies: yes
Region dummies: yes

Since one of my independent variables is aggregated at a higher level than
the dependent variable I cluster on the region*year level (260 clusters):

-xtreg depvar indepvars, fe vce(cluster region_year) nonest dfadj-

["region_year" was created with -egen region_year = group(region year)-]

This works fine, but I'm not sure if the combination of region*year as
definition of a cluster is OK with the fixed effects model, especially when
I include region and year dummies as well?

Clustering only one the regional level would result in 10 clusters, which is
too few when the number of clusters has to go to infinity for the
vce(cluster) estimation to work. Right?

Any help is greatly appreciated!


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