Answer key to problem set # 2 ECON 342 J . Marcelo Ochoa
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چکیده
ECON 342 J. Marcelo Ochoa Spring, 2009 Problem 1. For T = 2 consider the standard panel data model: yit = xitβ + αi + ǫit a) Numerically compare the fixed effect and first difference estimates. b) Compare the error variance estimates from the two methods. Solution. The difference estimates are obtained by taking the difference across time periods to eliminate the unobservable. Hence, for individual i we have, yi2 − yi1 = (xi2 − xi1)β + (ǫi2 − ǫi1) ⇒ ∆yi = ∆xiβ +∆ǫi Assuming that E (∆x′i∆ǫi) = 0, the difference estimate of β is,
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