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Re: st: Use of Fixed Effects with State and National Data
From
"Justina Fischer" <[email protected]>
To
[email protected]
Subject
Re: st: Use of Fixed Effects with State and National Data
Date
Wed, 28 Dec 2011 00:52:11 +0100
Hi Samuel,
my short advice is:
better include year effects, or at least a common time trend.
Estimating a model without that - you need to justify.
You can also estimate state-specific time trends to account for different developments over time across states.
Best regards
Justina
-------- Original-Nachricht --------
> Datum: Tue, 27 Dec 2011 17:07:34 -0600
> Von: Samuel Finkelstein <[email protected]>
> An: [email protected]
> Betreff: st: Use of Fixed Effects with State and National Data
> Hi everyone,
>
> I am in the process of working with a data set that includes both
> yearly state-level independent variables as well as yearly
> national-level independent variables, while the dependent variable is
> a state-specific variable. I have received mixed feedback regarding
> whether or not the use of yearly fixed effects is appropriate. The
> model I have been estimating is:
>
> State-specific demand i,t = state-specific control variables i,t +
> national-level control variable t + e
>
> where the national-level control variable is the rate on various
> T-bills and bonds, ranging from 3 months to 20 years, or inflation.
> Each model I estimate includes 5 state-level variables and only one
> national-level (interest rate or inflation) variable. The state-level
> and national-level variables all vary by time, but the state-level
> variables also vary by state.
>
> In each model, I have included state-specific fixed effects. However,
> I am trying to determine whether or not the inclusion of a time
> (yearly) fixed effect is also appropriate. When I estimate my models
> using yearly fixed-effects, the coefficients on the state-level
> variables do not change across the different models and the r-squared
> does not change across models. When I estimate my models when
> excluding yearly fixed effects, the r-squared varies across the models
> and the coefficients on the state-level variables also vary across the
> different models. I am inclined to go with that particular set of
> models (excluding the yearly fixed effects), but I have been warned by
> some that by excluding yearly fixed effects, the national-level
> interest rate variable is picking up variation that should be picked
> up by time fixed effects. In other words, the national-level
> variables are replacing the excluded year fixed effects and I cannot
> then make any valuable interpretation of the national-level variable
> (i.e., how do interest rates relate to demand). Below are my results
> (all non-interest variables vary by year and state, interest variables
> only vary by year and not by state since they are national variables):
>
> 3 month interest rate with year and state FE
> coeff. std. error
> 3monthinterest| .0937955 .0299048
> unemploy | .0003255 .0233223
> income | -3.74e-06 .0000128
> age | .0292728 .0448224
> newbuy | .4022719 .3591874
> homes| .0254584 .0107563
> r2 = 0.6689
>
> 20 year interest rate with year and state FE
> coeff. std. error
> 20yrinterest| .1819766 .0580196
> unemploy | .0003255 .0233223
> income | -3.74e-06 .0000128
> age | .0292728 .0448224
> newbuy | .4022719 .3591874
> homes | .0254584 .0107563
> r2 = 0.6689
>
> Below are the results when including state fixed effects without year
> fixed effects:
>
> 3 month interest rate with state FE only
> coeff. std. error
> 3monthinterest | .141143 .015493
> unemploy | .0073605 .0220101
> income | -.0000461 8.91e-06
> age | .0342493 .0515669
> newbuy | 1.801027 .4193282
> homes| .0244424 .0118203
> r2 = 0.5306
>
> 20 year interest rate with state FE only
> coeff. std. error
> 20yrinterest| .2815332 .0498411
> unemploy | -.0621116 .0218478
> income| -.0000226 .000013
> age | .0785964 .0519008
> newbuy| .9568831 .3819117
> homes| .0156787 .0123501
> r2 = 0.4906
>
> For what it is worth, I have also re-estimated the models excluding
> the year fixed effects and including additional national-level
> variables (such as annualized market return) along with the interest
> rate variable and the result on the interest rate variable is similar
> to the version without the annualized market return variable, while
> the annualized market return variable is insignificant.
>
> So, my question is: Is it appropriate or inappropriate to include year
> fixed effects given that I am including a variable that varies by year
> but does not vary by state within a given year (i.e., the interest
> rate variable)?
>
> If you have any thoughts regarding this issue I would greatly
> appreciate it, as I have received mixed feedback and I haven't found a
> study that explicitly deals with this particular issue.
>
> Any assistance would be greatly appreciated.
>
> Respectfully,
>
> Samuel Finkelstein
> *
> * For searches and help try:
> * http://www.stata.com/help.cgi?search
> * http://www.stata.com/support/statalist/faq
> * http://www.ats.ucla.edu/stat/stata/
--
Justina AV Fischer, PhD
COFIT Fellow
World Trade Institute
University of Bern
homepage: http://www.justinaavfischer.de/
e-mail: [email protected]. [email protected]
papers: http://ideas.repec.org/e/pfi55.html
*
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* http://www.stata.com/support/statalist/faq
* http://www.ats.ucla.edu/stat/stata/