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How cluster-robust inference is changing applied econometrics

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  • James G. MacKinnon

    () (Queen's University)

Abstract

In many fields of economics, and also in other disciplines, it is hard to justify the assumption that the random error terms in regression models are uncorrelated. It seems more plausible to assume that they are correlated within clusters, such as geographical areas or time periods, but uncorrelated across clusters. It has therefore become very popular to use "clustered" standard errors, which are robust against arbitrary patterns of within-cluster variation and covariation. Conventional methods for inference using clustered standard errors work very well when the model is correct and the data satisfy certain conditions, but they can produce very misleading results in other cases. This paper discusses some of the issues that users of these methods need to be aware of.

Suggested Citation

  • James G. MacKinnon, 2019. "How cluster-robust inference is changing applied econometrics," Working Paper 1413, Economics Department, Queen's University.
  • Handle: RePEc:qed:wpaper:1413
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    File URL: https://www.econ.queensu.ca/sites/econ.queensu.ca/files/wpaper/qed_wp_1413.pdf
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    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Back to School Reading
      by Dave Giles in Econometrics Beat: Dave Giles' Blog on 2019-09-01 13:40:00

    Citations

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    Cited by:

    1. Andreas Hagemann, 2019. "Permutation inference with a finite number of heterogeneous clusters," Papers 1907.01049, arXiv.org.
    2. Gerling, Lena & Kellermann, Kim Leonie, 2019. "The impact of election information shocks on populist party preferences: Evidence from Germany," CIW Discussion Papers 3/2019, University of M√ľnster, Center for Interdisciplinary Economics (CIW).
    3. James G. MacKinnon & Matthew D. Webb, 2019. "When and How to Deal with Clustered Errors in Regression Models," Working Paper 1421, Economics Department, Queen's University.
    4. Sanghyun Hong & W. Robert Reed, 2019. "Towards an Experimental Framework for Assessing Meta-Analysis Methods, with a Focus on Andrews-Kasy Estimators," Working Papers in Economics 19/13, University of Canterbury, Department of Economics and Finance.

    More about this item

    Keywords

    clustered data; cluster-robust variance estimator; CRVE; wild cluster bootstrap; robust inference;

    JEL classification:

    • C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
    • C21 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Cross-Sectional Models; Spatial Models; Treatment Effect Models
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models

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