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When macro time series meets micro panel data: A clear and present danger

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  • Huang, Ho-Chuan
  • Wang, Xiuhua
  • Xiong, Xin

Abstract

This short note addresses a serious problem in combining macro (country-level) time series data, e.g., oil price uncertainty (OPU) or economic/trade policy uncertainty (EPU/TPU), with micro (firm-level) financial and accounting panel data, e.g., corporate leverage, investment, and innovation, to name a few. In most of the applications, the main interest is to assess the impacts of country-level explanatory variable on the firm-level dependent variable, with year fixed effects (along with other firm fixed effects, etc.) being included. Since the macro time series are the same for all firms in each year, it is straightforward to show that the macro time series variable is perfectly correlated with the year fixed effects, and thus unidentifiable. We employ three real data sets to illustrate the perfect multicollinearity issue, and our demonstrations cast doubt on the findings of several existing studies suffering from this issue. Finally, we also offer some practical ways to get around with (at least mitigate) this problem.

Suggested Citation

  • Huang, Ho-Chuan & Wang, Xiuhua & Xiong, Xin, 2022. "When macro time series meets micro panel data: A clear and present danger," Energy Economics, Elsevier, vol. 114(C).
    • Handle: RePEc:eee:eneeco:v:114:y:2022:i:c:s0140988322004182
    DOI: 10.1016/j.eneco.2022.106289
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    More about this item

    Keywords

    Perfect multicollinearity; Two-way fixed effects; Oil price uncertainty; Economic policy uncertainty; Trade policy uncertainty;
    All these keywords.

    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit

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