On Sep 16, 2005, at 8:04 AM, Rachel Bouvier wrote:
The original project was to try and get a "trend" of GDP over
time, with the residuals as the fluctuations around that trend. Then,
I
would use both the trend and the flucuations as regressors in my second
stage model. Again, this was a few years ago, and I am trying to dust
off the model and see if it makes sense to revisit it. I know a lot
more now than I did then - I'm going to have to rethink the whole
thing.
I wish I had consulted Statalist then!
If you have enough data in the time dimension to estimate separate
trends per country, you may want to consider taking natural logs of
your GDP data and then linearly detrending (i.e. regressing against
time instead of both time and time^2). Odds are GDP exhibits compound
growth, so using a quadratic is just an approximation anyway -- and not
necessarily a good one -- to an underlying exponential growth function.
Additionally, when you use logs your estimated coefficients will have
elasticity interpretations, which are useful (as they are unit-free) in
cross-country studies. Hope this helps.
-- Mike
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