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Journal of Econometric Methods

Ed. by Giacomini, Raffaella / Li, Tong

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2156-6674
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An Algorithm to Estimate the Two-Way Fixed Effects Model

Paulo Somaini / Frank A. Wolak
Published Online: 2015-03-12 | DOI: https://doi.org/10.1515/jem-2014-0008

Abstract

We present an algorithm to estimate the two-way fixed effect linear model. The algorithm relies on the Frisch-Waugh-Lovell theorem and applies to ordinary least squares (OLS), two-stage least squares (TSLS) and generalized method of moments (GMM) estimators. The coefficients of interest are computed using the residuals from the projection of all variables on the two sets of fixed effects. Our algorithm has three desirable features. First, it manages memory and computational resources efficiently which speeds up the computation of the estimates. Second, it allows the researcher to estimate multiple specifications using the same set of fixed effects at a very low computational cost. Third, the asymptotic variance of the parameters of interest can be consistently estimated using standard routines on the residualized data.

This article offers supplementary material which is provided at the end of the article.

Keywords: Frisch-Waugh-Lovell theorem; GMM; OLS; panel data; two-way fixed effects

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About the article

Corresponding author: Paulo Somaini, Department of Economics, MIT, Cambridge, MA, USA, e-mail:


Published Online: 2015-03-12

Published in Print: 2016-01-01


Citation Information: Journal of Econometric Methods, Volume 5, Issue 1, Pages 143–152, ISSN (Online) 2156-6674, ISSN (Print) 2194-6345, DOI: https://doi.org/10.1515/jem-2014-0008.

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