Panel data models and transitory fluctuations in the explanatory variable

Terra McKinnish

A chapter in Modelling and Evaluating Treatment Effects in Econometrics, 2008, pp 335-358 from Emerald Group Publishing Limited

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.

Date: 2008
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Persistent link: https://EconPapers.repec.org/RePEc:eme:aecozz:s0731-9053(07)00011-4

DOI: 10.1016/S0731-9053(07)00011-4

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