Re: st: Year dummies in panel regs (Econometrics question)

[Muhammad Anees <anees@aneconomist.com>]

Hello Hari,

Robert Yaffee describes the Econometric Importance of including time
dummies in the following words. Please visit the following page and
read around the following paragraph for more details. You could find
some other issues related to Panel Data Analysis as well.

"" Quotation Starts Here""

Another type of fixed effects model could have constant slopes but
intercepts that differ according to time. In this case, the model
would have no significant country differences but might have
autocorrelation owing to time-lagged temporal effects. The residuals
of this kind of model may have autocorrelation in the process. In this
case, the variables are homogenous across the countries. They could be
similar in region or area of focus. For example, technological changes
or national policies would lead to group specific characteristics that
may effect temporal changes in the variables being analyzed. We could
account for the time effect over the t years with t-1 dummy variables
on the right-hand side of the equation. In Equation 3, the dummy
variables are named according to the year they represent.

"" Quotation Ends Here""

The link to this paragraph is
http://www.nyu.edu/its/pubs/connect/fall03/yaffee_primer.html

I wish this helps you in what you needed to know.

Best
Anees

On Sun, Jul 22, 2012 at 9:45 AM, Narahari H.S. <naraharihs@yahoo.co.in> wrote:
> Hello all,
>
> This is not a Stata specific question but a general econometrics question.
>
> I am curious to know why year dummies are included in panel regressions. I have asked a few professors and googled a bit but the only answer I get is "to capture unobserved year effects". Is that all there is to it or is there any other reason why they are included? Also, what is the mistake in not including them in the regression model?
>
> Thanks in advance
> Hari
>
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-- 

Best
---------------------------
Muhammad Anees
Assistant Professor/Programme Coordinator
COMSATS Institute of Information Technology
Attock 43600, Pakistan
http://www.aneconomist.com

*
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