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03.5.1. A Concise Derivation of the Wallace and Hussain Fixed Effects Transformation

Published online by Cambridge University Press:  01 October 2003

Badi H. Baltagi
Badi H. Baltagi
Affiliation:
Texas A&M University
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Extract

A concise derivation of the Wallace and Hussain fixed effects transformation.

Information

Type
PROBLEMS AND SOLUTIONS
Information
Econometric Theory , Volume 19 , Issue 5 , October 2003, pp. 879
Copyright
© 2003 Cambridge University Press

Consider the panel regression model with two-way error component disturbances defined by

Wallace and Hussain (1969) derive the fixed effects transformation for this model by “trial error and generalization.” Use the Frisch–Waugh–Lovell theorem described in Davidson and MacKinnon (1993, p. 19) to obtain a concise derivation of this Within transformation.

References

REFERENCES

Wallace, T.D. & A. Hussain (1969) The use of error components models in combining cross-section and time-series data. Econometrica 37, 55–72.Google Scholar
Davidson, R. & J.G. MacKinnon (1993) Estimation and Inference in Econometrics. New York: Oxford University Press.
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