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FEVD: Just IV or Just Mistaken?

Author

Listed:
  • Trevor Breusch
  • Michael B. Ward
  • Hoa Thi Minh Nguyen
  • Tom Kompas

Abstract

Fixed effects vector decomposition (FEVD) is simply an instrumental variables (IV) estimator with a particular choice of instruments and a special case of the well-known Hausman-Taylor IV procedure. Plümper and Troeger (PT) now acknowledge this point and disown the three-stage procedure that previously defined FEVD. Their old recipe for standard errors, which has regrettably been used in dozens of published research papers, produces dramatic overconfidence in the estimates. Again PT concede the point and now adopt the standard IV formula for standard errors. Knowing that FEVD is an application of IV also has the benefit of focusing attention on the choice of instruments. Now it seems PT claim that the FEVD instruments are always the best choice, on the grounds that one cannot know whether any potential instrument is correlated with the unit effect. One could just as readily make the same specious claim about other estimators, such as ordinary least squares, and support it with similar Monte Carlo assumptions and evidence.

Suggested Citation

  • Trevor Breusch & Michael B. Ward & Hoa Thi Minh Nguyen & Tom Kompas, 2011. "FEVD: Just IV or Just Mistaken?," Monash Economics Working Papers archive-17, Monash University, Department of Economics.
  • Handle: RePEc:mos:moswps:archive-17
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    File URL: http://dx.doi.org/10.1093/pan/mpr012
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    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Fixed-Effects Vector Decomposition
      by Dave Giles in Econometrics Beat: Dave Giles' Blog on 2012-06-12 23:36:00

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    Cited by:

    1. Bengt Söderlund & Patrik Tingvall, 2014. "Dynamic effects of institutions on firm-level exports," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 150(2), pages 277-308, May.
    2. Arouri, Mohamed El Hedi & Caporale, Guglielmo Maria & Rault, Christophe & Sova, Robert & Sova, Anamaria, 2012. "Environmental Regulation and Competitiveness: Evidence from Romania," Ecological Economics, Elsevier, vol. 81(C), pages 130-139.
    3. McDonald, Rebecca & Powdthavee, Nattavudh, 2018. "The Shadow Prices of Voluntary Caregiving: Using Panel Data of Well-Being to Estimate the Cost of Informal Care," IZA Discussion Papers 11545, Institute for the Study of Labor (IZA).
    4. repec:eee:wdevel:v:96:y:2017:i:c:p:145-162 is not listed on IDEAS
    5. Patrik Karpaty & Patrik Gustavsson Tingvall, 2015. "Offshoring and Home Country R&D," The World Economy, Wiley Blackwell, vol. 38(4), pages 655-676, April.
    6. Karpaty, Patrik & Gustavsson Tingvall, Patrik, 2011. "Offshoring of Services and Corruption: Do Firms Escape Corrupt Countries?," Working Papers 2011:2, Örebro University, School of Business, revised 28 May 2012.
    7. Farla, Kristine, 2012. "Institutions and credit," MERIT Working Papers 038, United Nations University - Maastricht Economic and Social Research Institute on Innovation and Technology (MERIT).
    8. Heyman Fredrik & Tingvall Patrik Gustavsson, 2015. "The Dynamics of Offshoring and Institutions," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 15(4), pages 1975-2016, October.
    9. Rhys Andrews, 2013. "Local government size and efficiency in labor-intensive public services: evidence from local educational authorities in England," Chapters,in: The Challenge of Local Government Size, chapter 7, pages 171-188 Edward Elgar Publishing.
    10. Markus Tepe, 2013. "Parties, Unions, and Activation Strategies: The Context-Dependent Politics of Active Labor Market Policy Spending," Discussion Papers 15, Central European Labour Studies Institute (CELSI).
    11. repec:oup:jecgeo:v:17:y:2017:i:6:p:1209-1249. is not listed on IDEAS
    12. M. Hashem Pesaran & Qiankun Zhou, 2018. "Estimation of time-invariant effects in static panel data models," Econometric Reviews, Taylor & Francis Journals, vol. 37(10), pages 1137-1171, November.
    13. repec:eee:joepsy:v:62:y:2017:i:c:p:246-257 is not listed on IDEAS
    14. Ari Kokko & Patrik Gustavsson Tingvall, 2014. "Distance, Transaction Costs, and Preferences in European Trade," The International Trade Journal, Taylor & Francis Journals, vol. 28(2), pages 87-120, June.
    15. Tingvall, Patrik, 2011. "Dynamic Effects of Corruption on Offshoring," Ratio Working Papers 182, The Ratio Institute.
    16. Rhys Andrews, 2012. "Local Government Size and Efficiency in Labour Intensive Public Services: Evidence from Local Educational Authorities in England," International Center for Public Policy Working Paper Series, at AYSPS, GSU paper1214, International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University.
    17. Felis-Rota, Marta, 2014. "A VAR Analysis of the Transportation Revolution in Europe," Working Papers in Economic History 2014/01, Universidad Autónoma de Madrid (Spain), Department of Economic Analysis (Economic Theory and Economic History).
    18. Kokko, Ari & Gustavsson Tingvall, Patrik, 2012. "The Eurovision Song Contest, Preferences and European Trade," Ratio Working Papers 183, The Ratio Institute.
    19. Nguyen, Hoa-Thi-Minh & Kompas, Tom & Breusch, Trevor & Ward, Michael B., 2017. "Language, Mixed Communes, and Infrastructure: Sources of Inequality and Ethnic Minorities in Vietnam," World Development, Elsevier, vol. 96(C), pages 145-162.
    20. Gustavo Canavire-Bacarreza & Jorge Martinez-Vazquez & Bauyrzhan Yedgenov, 2017. "Reexamining the determinants of fiscal decentralization: what is the role of geography?," Journal of Economic Geography, Oxford University Press, vol. 17(6), pages 1209-1249.

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