Thanks very nice explanation
--- Kit Baum <[email protected]> wrote:
> Anita wrote
>
> When do you require residuals to be clustered in
> regressions? How do you go about doing it in Stata?
>
> For example I run pooled OLS for biateral
> country-pair
> regression. Should I suspect residuals for i and j
> may
> be correlated..Or is it routine to assume such
> correlation in pooled estimations?
>
>
> The notion of cluster-robust standard errors is to
> allow each cluster
> to have its own error variance, and within each
> cluster, the
> assumption of independence of errors is relaxed. It
> would be very
> sensibly applied to bilateral country-pair data if
> pooled OLS is
> encountered.
>
> However, with this sort of data (with which I have
> worked
> extensively) you are making an assumption, in pooled
> OLS, that there
> is no unobserved heterogeneity. If there are common
> elements to a
> country-pair that might influence their errors over
> time, it is also
> sensible that there might be a 'special
> relationship' between country-
> pairs that might cause their relationship to differ
> from other
> country-pairs. In other words fixed effects by
> country-pair might be
> very sensible. If you create a country-pair
> indicator variable and -
> xtreg, fe-, and the F-test at the foot of the model
> rejects its null,
> it is saying that the pooled OLS model is delivering
> inconsistent
> point estimates. This problem cannot be rectified by
> adjusting the
> standard errors.
>
>
> Kit Baum, Boston College Economics and DIW Berlin
> http://ideas.repec.org/e/pba1.html
> An Introduction to Modern Econometrics Using Stata:
> http://www.stata-press.com/books/imeus.html
>
>
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