# time trend or year effect for pooled data

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## time trend or year effect for pooled data

 Dear Statalist, 1) I have a equation as this: y=a+b1*X1+b2*X2+b3*X3+...+ c*T + error, where a, b, c are coefficients; 2) Y is a couple of dependent variables, which could be binary or continuous; 3) T is a time trend and I use it to capture year effect; 4) My observation is user groups which were visited in different years and I pool them together, treating them as cross-sectional data. My question: how should I treat T? Should I value it as 1, 2, 3, ..., OR just yearly (eg., 1990, 1991, 1992, ....). I run regressions (both Probit and OLS) using both methods, and the regression results give me different coefficients ad t statistics  for "T". Could anyone explain why and which method is appropriate for pooled data? Thank you very much for your help. Yan Sun IFPRI * *   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/
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## re: time trend or year effect for pooled data

 <> Yan said > 1) I have a equation as this: y=a+b1*X1+b2*X2+b3*X3+...+ c*T + > error, where a, b, c are coefficients; > 2) Y is a couple of dependent variables, which could be binary or > continuous; > 3) T is a time trend and I use it to capture year effect; > 4) My observation is user groups which were visited in different > years and I pool them together, treating them as cross-sectional data. > > My question: how should I treat T? Should I value it as 1, 2, 3, ..., OR > just yearly (eg., 1990, 1991, 1992, ....). I run regressions (both > Probit and OLS) using both methods, and the regression results give me > different coefficients ad t statistics  for "T". > > Could anyone explain why and which method is appropriate for pooled > data? In a pooled setting, I would include time fixed effects (i.e. i.year in factor-variable notation) which will estimate a coefficient for each year. This set of variables will absorb all time-specific (or "macro') variation. If you use instead a time trend, it does not matter whether it starts from 1 or starts from 1990; any variable for which D.time is a constant will yield the same results, in terms of explanatory power. But using a linear time trend constrains the time-effect coefficients to lie on a straight line, whereas estimating i.time allows the coefficient pattern over years to be whatever the data chooses. If you have ten years, it is a difference between estimating nine coefficients and one coefficient. Are those eight constraints accepted by the data? That is an easily testable hypothesis. 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* *   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/
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## re: time trend or year effect for pooled data

 In reply to this post by Sun, Yan (IFPRI) To professor Kit Baum, thank you very much for your help. Would you please let me know what is the test you mentioned at the end of your last email (are those eight constraints accepted by the data? That is an easily testable hypothesis.) Thanks. Yan * *   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/
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## re: time trend or year effect for pooled data

 In reply to this post by Sun, Yan (IFPRI) <> > To professor Kit Baum, thank you very much for your help. Would you > please let me know what is the test you mentioned at the end of your > last email (are those eight constraints accepted by the data? That is an > easily testable hypothesis.) Thanks. Say you estimate the model y_it = b_0 + b1_t,  t=1,2,3 then the effects of time are b1, 2 b1, 3 b1, respectively. You estimate two parameters. Instead consider the model (sans constant) y_it = d_0 + d_1 T2 + d_2 T3 where T2, T3 are dummies for time=2 and time=3 respectively. You estimate three parameters. d_0 is the conditional mean of y | time=1. If the effect of time is linear, d_2 should be twice d_1. That is one constraint which can be tested or imposed. Run the enclosed, in which the effect of time is constructed to be nonlinear, and you can see the difference. ------------------------------ webuse grunfeld, clear drop if year>1937 tsset g y = year + 0.5*(year-1935)^2 + rnormal(0,1) // allow for time effects => three coeffs to be estimated reg y i.year test 2*1936.year = 1937.year // force linear trend => two coefficients to be estimated reg y year // enforce the linearity constraint const def 1 2*1936.year=1937.year cnsreg y i.year, c(1) -------------------------------- 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* *   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/