I have a rather basic questions about fixed effects models. I am estimating
a fixed effects model, where my dependent variable is a trade
specialisation index for four countries with respect to six other countries
(basically I have countries 1, 2, 3, and 4 and I create an index for each
of the countries in relation to countries 5 - 10). I then regress that
index on a number of independent variables, one of them being investment
flows from the six countries into each of the four countries.
When I run the regression with "xtreg, fe", Stata creates "too many" fixed
effects, as it takes each country-by-country trade index as a fixed effect
(thus I end up with 24 fixed effects dummies). I however want only four
fixed effects, namely one dummy each for countries 1 to 4. Is it ok if I
run the regression only with "reg" and add the four country dummies
manually? When I did that the results seemed very reasonable, but I'm not
sure if that's appropriate to do.
