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Panel data models and transitory fluctuations in the explanatory variable

In: Modelling and Evaluating Treatment Effects in Econometrics

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  • Terra McKinnish

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.

Suggested Citation

  • Terra McKinnish, 2008. "Panel data models and transitory fluctuations in the explanatory variable," Advances in Econometrics, in: Modelling and Evaluating Treatment Effects in Econometrics, pages 335-358, Emerald Group Publishing Limited.
    • Handle: RePEc:eme:aecozz:s0731-9053(07)00011-4
    DOI: 10.1016/S0731-9053(07)00011-4
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    Cited by:

    1. Kurek, Przemysław J. & Fałkowski, Jan, 2022. "Religiosity and political participation - Panel data evidence from post-communist Poland," European Journal of Political Economy, Elsevier, vol. 75(C).
    2. Laura Spierdijk, 2023. "Assessing the consistency of the fixed-effects estimator: a regression-based Wald test," Empirical Economics, Springer, vol. 64(4), pages 1599-1630, April.

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