Dear all,
I am working with panel data and would like to proceed with a two-way fixed effects model:
𝑌it=𝛼i+𝛾t+𝛽𝑋i+𝛿Z𝑖𝑡+𝜖𝑖𝑡
In my model, I have unobserved heterogeneity (ai) and time effects (𝛾t). Instead of using the within transformation, I want to apply the Mundlak specification to ensure the correlation between 𝛼i and regressors (I do not want to use the within transformation as it will remove 𝑋𝑖 from my model). The Mundlak approach is to time-averages of Z𝑖𝑡 as an additional regressor. Yet, I want to account for the unobserved time effects (𝛾𝑡). Does it make sense to simply include time dummies (given that I have very few time periods, so I think it is rather efficient) in Mundlak's specification? So the final model I want to estimate is:
𝑌it=𝛼i+𝛾tDt+𝛽𝑋i+𝛿Z𝑖t+b\bar{Z𝑖}+𝜖𝑖𝑡 where 𝐷𝑡is the time dummy.
Would be thankful for any suggestions.