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Panel data models and transitory fluctuations in the explanatory variable

Modelling and Evaluating Treatment Effects in Econometrics

ISBN: 978-0-7623-1380-8, eISBN: 978-1-84950-523-9

Publication date: 21 February 2008

Abstract

This chapter demonstrates that fixed-effects and first-differences models often understate the effect of interest because of the variation used to identify the model. In particular, the within-unit time-series variation often reflects transitory fluctuations that have little effect on behavioral outcomes. The data in effect suffer from measurement error, as a portion of the variation in the independent variable has no effect on the dependent variable. Two empirical examples are presented: one on the relationship between AFDC and fertility and the other on the relationship between local economic conditions and AFDC expenditures.

Citation

McKinnish, T. (2008), "Panel data models and transitory fluctuations in the explanatory variable", Fomby, T., Carter Hill, R., Millimet, D.L., Smith, J.A. and Vytlacil, E.J. (Ed.) Modelling and Evaluating Treatment Effects in Econometrics (Advances in Econometrics, Vol. 21), Emerald Group Publishing Limited, Leeds, pp. 335-358. https://doi.org/10.1016/S0731-9053(07)00011-4

Publisher

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Emerald Group Publishing Limited

Copyright © 2008, Emerald Group Publishing Limited