RE: st: Year Fixed Effect Interpretation

[Mauro Mastrogiacomo <M.Mastrogiacomo@cpb.nl>]

Vinod, 
Why would you drop to time dummies? According to the dummy variables approach, dropping one is enough.
Anyway I suppose that the answer to this question is that it will change reference case, and therefore the (interpretation of) the coefficients.
If you drop the first two years and you then get a sequence of increasing positive coefficients for the remaining dummies, you might interpret it is as an increasing time trend relative to the fist two years. If you drop the last two years, then the remaining time dummies-coefficients will possibly change to negative, because the time trend is increasing and the reference case is the last two years (the highest point of the time trend in my example).
If you drop two consecutive years in the middle, the pattern would be a combination of the two possibilities above.
If you drop two random year dummies, then it gets very difficult to give a sensible interpretation to my eyes, as you would interpret each coefficient as being relative to a reference case that is a combination of two randomly chosen variables. Of course you may still claim that you accounted for time effects, though in a very unusual way.
Mauro



-----Original Message-----
From: owner-statalist@hsphsun2.harvard.edu [mailto:owner-statalist@hsphsun2.harvard.edu] On Behalf Of Venkiteshwaran, Vinod
Sent: vrijdag 9 september 2011 15:30
To: statalist@hsphsun2.harvard.edu
Subject: Re: st: Year Fixed Effect Interpretation

Maarten/Mauro/Austin
Thank you for your inputs. In the absence of a new variable that is collinear with the year dummies, what is effect of dropping two dummies, one on either end of the sample, as opposed to dropping two at the beginning or the end?

Vinod

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