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Panel data and lagged dep variable

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Panel data and lagged dep variable

Fabio Zona
Dear Statalist

in a panel test, to what extent is it acceptable a model with no lagged dep variable among the indep variables? Is it always necessary to include a lag dep variable? Moreover: what do you think about a model that has all variables (both y and x) at the same year?
Please: is there a reference that clarify these issues?

Thank you.
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AW: Panel data and lagged dep variable

Martin Weiss-5

<>

The entire [XT] manual is your reference of choice, I would say, particularly since you have it in pdf form on your machine. Look at the examples in -help xtreg-, where you won`t see lagged values...



HTH
Martin


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Von: [hidden email] [mailto:[hidden email]] Im Auftrag von Fabio Zona
Gesendet: Freitag, 24. September 2010 12:04
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Betreff: st: Panel data and lagged dep variable

Dear Statalist

in a panel test, to what extent is it acceptable a model with no lagged dep variable among the indep variables? Is it always necessary to include a lag dep variable? Moreover: what do you think about a model that has all variables (both y and x) at the same year?
Please: is there a reference that clarify these issues?

Thank you.
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Re: Panel data and lagged dep variable

amatoallah ouchen
In reply to this post by Fabio Zona
Good day,
No it's not always necessary as we have in this case the static panel
data model, the inclusion of the lagged dependant variable among the
explanatory gives as the dynamic approach. I hope those classe notes
may give you some insights.
http://www.cemfi.es/~arellano/static-panels-class-note.pdf

Ama
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Re: Panel data and lagged dep variable

wangpan110
In reply to this post by Fabio Zona
Hi, my understanding is static model presents long-term/equilibrium relationship, while the dynamic model presents short-term/disequilibrium relation.
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Re: Panel data and lagged dep variable

Christopher Baum-2
In reply to this post by Fabio Zona
<>
On Sep 25, 2010, at 2:33 AM, Fabio wrote:

> in a panel test, to what extent is it acceptable a model with no lagged dep variable among the indep variables? Is it always necessary to include a lag dep variable? Moreover: what do you think about a model that has all variables (both y and x) at the same year?
> Please: is there a reference that clarify these issues?

In terms of an economic model, if you write down y_{i,t} = f (X) where the Xs may contain current and past values, but not including lagged y, you are arguing that the data observed at each point in time represent equilibria. If you believe that it takes more than one of your time periods for economic agents to adjust to changes in the Xs (or to adjust to shocks), then the LDV is warranted. As you can always estimate the model (although not with fixed or random effects!) including the LDV, you can test whether it is warranted in your particular setup.  If you do that, it would probably be a good idea to include time dummies as well, as the absence of those factors could confound the analysis of the LDV's significance.

Kit



Kit Baum   |   Boston College Economics & DIW Berlin   |   http://ideas.repec.org/e/pba1.html
                              An Introduction to Stata Programming  |   http://www.stata-press.com/books/isp.html
   An Introduction to Modern Econometrics Using Stata  |   http://www.stata-press.com/books/imeus.html


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Re: Panel data and lagged dep variable

wangpan110
Hi Kit, as you indictaed "If you believe that it takes more than one of your time periods for economic agents to adjust to changes in the Xs (or to adjust to shocks), then the LDV is warranted." does that mean current value of Y is closely related with previous value of Y? e.g company's current income is closely related with previous income.
   
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re: Re: Panel data and lagged dep variable

Christopher Baum-2
In reply to this post by Fabio Zona
<>
Hi Kit, as you indictaed "If you believe that it takes more than one of your
time periods for economic agents to adjust to changes in the Xs (or to
adjust to shocks), then the LDV is warranted." does that mean current value
of Y is closely related with previous value of Y? e.g company's current
income is closely related with previous income.

In a predictive sense, if the coeff on the LDV is not statistically distinguishable from zero, then current income is not closely related to previous income, cet.par. But the real question is whether a change in X causes income to change only in the current period or whether it has effects on subsequent periods. If it does, then something like a partial adjustment process is in order, and the LDV should be included.

You can't just look at the ACF of current income.

KIt



Kit Baum   |   Boston College Economics & DIW Berlin   |   http://ideas.repec.org/e/pba1.html
                              An Introduction to Stata Programming  |   http://www.stata-press.com/books/isp.html
   An Introduction to Modern Econometrics Using Stata  |   http://www.stata-press.com/books/imeus.html


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Re: re: Re: Panel data and lagged dep variable

wangpan110
Hi Kit, thank you very much for letting me understand LDV much better and deeper.
As you mentioned, the prupose of involving LDV is to account the subsequent influence of change in Xs. You also indicate we should include time dummies to in favor of LDV. My understanding of time dummies is to absorb time-specific changes (e.g shocks). i understand LDV and time dummies should be consistent, but exactely in what extant, the time dummies and LDV are consitent in the regression?

Pan
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re: Re: Panel data and lagged dep variable

Christopher Baum-2
In reply to this post by Fabio Zona
<>
Hi Kit, thank you very much for letting me understand LDV much better and
deeper.
As you mentioned, the prupose of involving LDV is to account the subsequent
influence of change in Xs. You also indicate we should include time dummies
to in favor of LDV. My understanding of time dummies is to absorb
time-specific changes (e.g shocks). i understand LDV and time dummies should
be consistent, but exactely in what extant, the time dummies and LDV are
consitent in the regression?


If there are significant time-specific common factors (e.g., business cycle factors) appearing in the response variable,
then by omitting time dummies you are misspecifying the model, and estimates of any coefficients (including
the coefficient of the LDV) are likely to be biased and inconsistent. Include the dummies, do an F-test for their
joint significance, and if you don't need them, out they go. But determining whether a static or dynamic model
is needed should be performed in the context of a well-specified model.

Kit
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re: Re: Panel data and lagged dep variable

Clive Nicholas
Kit Baum replied to Pan Wang:

> If there are significant time-specific common factors (e.g., business cycle factors) appearing in the response variable,
> then by omitting time dummies you are misspecifying the model, and estimates of any coefficients (including
> the coefficient of the LDV) are likely to be biased and inconsistent. Include the dummies, do an F-test for their
> joint significance, and if you don't need them, out they go. But determining whether a static or dynamic model
> is needed should be performed in the context of a well-specified model.

Absolutely right, of course. But frequently I find myself estimating
unbalanced pooled-panel models with singleton unit dummies, which
naturally drop out of the model. Consequently, I have to circumvent
this issue by demeaning the explanatory variables within units and
then re-estimating. But, as you'll know, that typically comes at the
cost of reduce the reducing the amount of variation in the response
variable my model would have had a chance of explaining. Your answer
to this might be: "Then collect more data". But, as you'll also know,
that's not always possible.

--
Clive Nicholas

[Please DO NOT mail me personally here, but at
<[hidden email]>. Please respond to contributions I make in
a list thread here. Thanks!]

"My colleagues in the social sciences talk a great deal about
methodology. I prefer to call it style." -- Freeman J. Dyson.
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