Question

1. State if each of the following statements is true or not, and BRIEFLY give your rea- soning. (3 sentences maximum for each question) (d) By using a panel data set one can control for time-invariant unobserved attributes of the members of the cross section, which are correlated with explanatory vari- ables. (3 marks) (e) For FE estimator to be consistent, the idiosyncratic errors u must be homoskedas- tic. (3 marks) (f) By using ", robust" option in Stata, the cluster robust standard errors will be obtained for FE estimation. (3 marks)

Answer 1

Answer:-

d)true.

reasoning:-

control variables for the effect of regional agreements can be added tothe basic Such estimates require the use of panel data to check for potential .... time series is constructed for each cross-sectional memberof the dataset and . correlation between some explanatory variablesand some unobservable characteristics.

e)not

resoning:-

In effect GMM is a procedure that produces ``efficient" estimators consistency of OLS One good estimation approach should be able to estimate model parameters .... Making inference robust to serial correlation in the idiosyncratic errors for .... is to establish the efficiency of simple estimators

f)true,

reasoning:-

Clustering standard errors are important when individual observations can be grouped into clusters where the model errors are correlated within a cluster but not between clusters. Not controlling for the within cluster correlation might lead to misleadingly small standard errors for the estimates and thus misleadingly narrow confidence intervals. This is typically necessary in case of survey-data where the unit of observation is households/individuals/schools etc.

reasoning:-