Re: st: Fixed Effects Model and Year Dummies

[Jed Cohen <jedcohen@vt.edu>]

Hi Drew,
I would strongy suggest you include year dummies at a minimum, to
control for temporal variation in your dependent variable. I don't
know what you are modeling, but often a phenomenon varies between
years/seasons/months for reasons that are not adequately captured by
the explanatory variables in the model. Not including a time fixed
effect then leads to ommitted variable bias. you can use
xtset panelvar timevar
xtreg, fe
for this model, though I usually prefer to do this manually with sets
of indicator variables, which gives greater control and intuition into
the process. Hausman tests can generally be used to compare sets of
coefficients, though I think the decision to include time fixed
effects should hinge on whether or not you think there is temporal
variation that is not due to your set of explanatory variables.
Best,
JED



On Fri, Sep 13, 2013 at 12:11 PM, Drew Reed <drew.reed1@gmail.com> wrote:
> Hi,
>
> I'm running a fixed effects regression on panel data. I am aware of
> the fact that fixed effects models control for time invariant
> characteristics, like that of country effects, etc. I am wondering,
> however, if I should include year dummies in my regression. Are these
> dummies time-invariant? Would Stata control for these in using the
> xtreg, fe command and are there any tests that can be performed to see
> if they should be included?
>
> Thanks,
>
> Drew
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-- 
----------------------------------------
Jed J. Cohen
Graduate Researcher
Virginia Tech
Dept. of Agricultural and Applied Economics
jedcohen@vt.edu
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