Arbeitspapier
Untangling Fixed Effects and Constant Regressors
Fixed effects (FE) in panel data models overlap each other and prohibit the identification of the impact of ''constant'' regressors. Think of regressors that are constant across countries in a country-time panel with time FE. The traditional approach is to drop some FE and constant regressors by normalizing their impact to zero. We introduce ''untangling normalization'', meaning that we orthogonalize the FE and, if present, the constant regressors. The untangled FE are much easier to interpret. Moreover, the impact of constant regressors can now be estimated, and the untangled FE indicate to what extent the estimates reflect the true value. Our untangled estimates are a linear transformation of the traditional, zero-normalized estimates; no new estimation is needed. We apply the approach to a gravity model for OECD countries' exports to the US. The constant regressors US GDP, world GDP and the US effective exchange rate explain 90% of the time FE, making the latter redundant, so the estimated impacts indeed reflect the true value.
- Sprache
-
Englisch
- Erschienen in
-
Series: Tinbergen Institute Discussion Paper ; No. 15-137/VI
- Klassifikation
-
Wirtschaft
Methodological Issues: General
Single Equation Models; Single Variables: Panel Data Models; Spatio-temporal Models
Empirical Studies of Trade
- Thema
-
gravity model
fixed effects
multicollinearity
normalization
orthogonalization
- Ereignis
-
Geistige Schöpfung
- (wer)
-
Klaassen, Franc
Teulings, Rutger
- Ereignis
-
Veröffentlichung
- (wer)
-
Tinbergen Institute
- (wo)
-
Amsterdam and Rotterdam
- (wann)
-
2015
- Handle
- Letzte Aktualisierung
-
10.03.2025, 11:45 MEZ
Datenpartner
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Objekttyp
- Arbeitspapier
Beteiligte
- Klaassen, Franc
- Teulings, Rutger
- Tinbergen Institute
Entstanden
- 2015
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