 When macro time series meets micro panel data: A clear and present dangerHo-Chuan Huang, Xiuhua Wang and Xin Xiong Energy Economics, 2022, vol. 114, issue C Abstract: This short note addresses a serious problem in combining macro (country-level) time series data, e.g., oil price uncertainty (OPU) or economic/trade policy uncertainty (EPU/TPU), with micro (firm-level) financial and accounting panel data, e.g., corporate leverage, investment, and innovation, to name a few. In most of the applications, the main interest is to assess the impacts of country-level explanatory variable on the firm-level dependent variable, with year fixed effects (along with other firm fixed effects, etc.) being included. Since the macro time series are the same for all firms in each year, it is straightforward to show that the macro time series variable is perfectly correlated with the year fixed effects, and thus unidentifiable. We employ three real data sets to illustrate the perfect multicollinearity issue, and our demonstrations cast doubt on the findings of several existing studies suffering from this issue. Finally, we also offer some practical ways to get around with (at least mitigate) this problem. Keywords: Perfect multicollinearity; Two-way fixed effects; Oil price uncertainty; Economic policy uncertainty; Trade policy uncertainty (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:eneeco:v:114:y:2022:i:c:s0140988322004182 DOI: 10.1016/j.eneco.2022.106289 Access Statistics for this article Energy Economics is currently edited by R. S. J. Tol, Beng Ang, Lance Bachmeier, Perry Sadorsky, Ugur Soytas and J. P. Weyant More articles in Energy Economics from Elsevier |
Is your work missing from RePEc? Here is how to contribute.
Questions or problems? Check the EconPapers FAQ or send mail to .
EconPapers is hosted by the
School of Business at Örebro University.