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Consider for example, the fixed effect panel model given byyit = x0itβ

+ αi + εit i = 1, · · · , n; t = 1, · · · , Twhere data have been collected on n cross-sectional units over T time periods. Here yitis a variable we are trying to ‘explain’, αi captures the ‘fixed-effects’ peculiar to eachcross-section that presumably do not change over time, xit is a k-dimensional vector of‘explanatory’ variables, β are the corresponding coefficients and finally εit are iid shocks.In these models, usually it is the βj ’s that are of interest. Show that if that is the case,we could obtain their OLS estimates by regressing yit − yi. on the variables in xit − xi.,where for any variable zit, zi. = 1/T PTi=1 zit

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OLS Estimator-Fixed Effects.docx
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Subject: Business, Economics

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