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RE: Re:RE: Re: st: Residuals in Panel Data regression

From   DE SOUZA Eric <>
To   "" <>
Subject   RE: Re:RE: Re: st: Residuals in Panel Data regression
Date   Wed, 25 Apr 2012 20:29:31 +0200

Sorry, stupid of me. I had something else in mind when I replied. Partialling out the dummies in the LSDV model is equivalent to the within transformation in FE..

Eric de Souza

-----Original Message-----
From: [] On Behalf Of Christopher Baum
Sent: 25 April 2012 13:59
Subject: Re:RE: Re: st: Residuals in Panel Data regression

On Apr 25, 2012, at 2:33 AM, Eric wrote:

> FE treats the unobserved time invariant component as random and, therefor, requires strict exogeneity, which means that the lagged dependent variable is ruled out as a regressor. 
> OLS with dummies (constants) only requires contemporaneous exogeneity and can include the lagged dependent variable as a regressor.

If you do

webuse grunfeld,clear
reg invest L.invest mvalue
xtreg invest L.invest mvalue,fe

you will find, unsurprisingly, that the two sets of point and interval slope estimates are identical. We know that the FE results are subject to Nickell bias, so they should not be relied upon, as the within transformation performed by xtreg,fe induces correlation between the transformed LDV and error.
But the OLS results are, by construction, identical, as the LSDV model is just another way of producing the within transformation.
In what sense do you consider the OLS results more acceptable, in terms of bias and consistency in the N dimension, than those from xtreg, fe?


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

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