[Gretl-users] fixed effects panel estimation

Allin Cottrell cottrell at wfu.edu
Fri Jul 17 22:44:53 EDT 2009


On Fri, 17 Jul 2009, Iveta Paterova wrote:

> thank you for your answer. The problem is that every literature
> recommeds fixed effect model as a correct estimator. It is a
> gravity equalition, therefore some county-specific variables
> remain and do not chage over the time.

You cannot include regressors that are time-invariant in a fixed
effects specification.  Mathematical fact of nature, doesn't
matter what software you are using.  Please see the discussion in
Chapter 15, "Panel Data", in the Gretl User's Guide.

The fixed effects model sweeps out between-group variation in
either of two ways: by including dummy variables specific to each
of the groups, or by subtracting the group means from the
regressors.

On the dummy variables approach, a time-invariant variable (for
example, something basically geographic) will (inherently) be
perfectly collinear with the group dummies, it's just another
group-specific constant.  On the approach of subtracting the group
means, such variables will collapse to nothing but zeros, since
every observation has value equal to the relevant group mean,

If anyone told you the fixed effects specification would work with
such variables, they were misinformed.

Allin Cottrell


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