st: 2SLS fixed effects estimation and time effects

["Katarina Lynch" <ferkel999@hotmail.com>]

Dear all,

I run a command

xi: xtivreg y x1 x2 x3 i.year, fe

and get very large standard errors, p-value of the F-test (null: no fixed 
effects) = 1

however,

xi: xtreg y x1 x2 x3 i.year, fe

gives more sensible results. Why does the fixed effects estimation with 
instrumental variables when time effects are controlled for, give no better 
results than in OLS? I have a feeling that time effects are incompatible 
with xtivreg, fe because fixed effects captures within variation over time. 
However, in OLS case it is working fine. I would very much appreciate any 
help! Instrumental variables are lagged values of the regressors.

Below is the output:

xi: xtivreg Y X1 X2 X3 X4 i.year (X5 X6 X7=X5_lag X6_lag

>  X7_lag), fe
i.year            _Iyear_1960-1990    (naturally coded; _Iyear_1960 omitted)

Fixed-effects (within) IV regression         Number of obs      =          
123
Group variable: id2                          Number of groups   =           
54

R-sq:  within  =      .                      Obs per group: min =            
1
      between = 0.0386                                     avg =          
2.3
      overall = 0.0655                                     max =            
3

                                            Wald chi2(8)       =    275.75
corr(u_i, Xb)  = -0.8763                     Prob > chi2        =    0.0000

------------------------------------------------------------------------------
 Y|      Coef.   Std. Err.      z    P>|z|     [95% Conf. Interval]
-------------+----------------------------------------------------------------
        X5 |   9.052149   12.92154     0.70   0.484     -16.2736     
34.3779
       X6|  -7.896397   15.88667    -0.50   0.619     -39.0337    23.24091
       X7 |  -42.29215   64.92772    -0.65   0.515    -169.5481    84.96384
     X1 |  -6.873546   3.581599    -1.92   0.055    -13.89335    .1462598
        X2 |   2.607123   5.567398     0.47   0.640    -8.304776    
13.51902
       X3|   9.689091    16.8018     0.58   0.564    -23.24184    42.62002
    X4 |  (dropped)
_Iyear_1970 |  -10.75312   11.70917    -0.92   0.358    -33.70266    
12.19643
_Iyear_1980 |  -3.804827   4.229946    -0.90   0.368    -12.09537    
4.485716
_Iyear_1990 |  (dropped)
      _cons |   152.8336   179.9555     0.85   0.396    -199.8727    
505.5399
-------------+----------------------------------------------------------------
    sigma_u |  7.7108873
    sigma_e |  4.4741294
        rho |   .7481261   (fraction of variance due to u_i)
------------------------------------------------------------------------------
F  test that all u_i=0:     F(53,61) =     0.28           Prob > F    = 
1.0000
------------------------------------------------------------------------------
Instrumented:   X5 X6 X7
Instruments:   X1 X2 X3 X4 _Iyear_1970 _Iyear_1980 _Iyear_1990
               X5_lag X6_lag X7_lag

.
.

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