Basic Misspecification Testing and Respecification
The Panel Data Case
In this chapter we test for and correct (if needed) misspecification issues 1 through 5 from Chapter 1 specifically for panel data regressions. The order of the misspecification testing and respecification procedures certainly works well for me when using cross-sectional models, and it seems to work particularly well with panel data models. Exactly why, I don’t know; but, I suspect it has much to do with the fact that panel data has an extra dimension—a time dimension. Hence, we need to add misspecification (3) to our list of procedures—dependent variable dynamics in panel data. I’ve found that once (3) is addressed, the theoretical interpretation of the results ...
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