Code:
xtreg rgfe L.fc L.fri L.og L.debt, fe estimates store fixed xtreg rgfe L.fc L.fri L.og L.debt, re hausman fixed chi2(4) = (b-B)'[(V_b-V_B)^(-1)](b-B) = 32.51 Prob>chi2 = 0.0000
1) Is it then appropriate to use the fixed effects model with time dummies included without having to test once again or should I follow the same process as above for the model with time dummies included?
2) Should I perform this test for each specification of my model, e.g. if I include a fiscal council independence index as another explanatory variable, or only for my baseline regression?
I also have another problem. When estimating the impact that a fiscal council's presence has on budget balance forecast errors, a Hausman test indicates that random effects are preferred but when estimating the impact on absolute budget balance forecast errors, fixed effects are preferred. Theoretically, it seems I should use fixed effects for both since I expect the unobserved individual effects to be correlated with the other explanatory variables (e.g. a country's attitude towards fiscal discipline is likely to determine whether or not a fiscal council is instituted). How would I overcome this? Would it be best to go ahead with random effects even though I don't think the assumptions for it are satisfied?
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