Explain with illustration the computation process of fixed effect estimation method.
The fixed effect (FE) estimation method in applied econometrics is used to control for unobserved heterogeneity when this heterogeneity is constant over time but varies across entities, such as individuals, firms, or countries. The main idea is to remove the effect of time-invariant characteristics so that the estimated coefficients reflect the impact of the explanatory variables more accurately. _____ __________ ___ ___ _______ ___ ________.
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Explain with illustrations the various steps involved in econometric methodology. What are the consequences of omitting a relevant explanatory variable in a regression model?
Multicollinearity
Logit Model and probit model.
Empirical Research.
Explain with illustration the computation process of fixed effect estimation method.
Given the following model:
Where D₁=0 for the first 20 observations and D₁=1 for the remaining 30 observations. You are also told that var (u2i)=300.
(a) How would you interpret ẞ₁ and ẞ2?
(b) What are the mean values of the two groups?
Consider the following Keynesian model of income determination
Where,
C= Consumption expenditure
I=Investment expenditure
Y=Income
G=Government expenditure
G₁ and Yt-1 are assumed predetermined
(a) State the reduced form equations and determine which of the preceding equations are identified.
(b) Which method will you use to estimate the parameters of the over identified equation and of the exactly identified equation? Justify your answer.