## Pooling Time-Series of Cross-Section Data

12.1 Fixed Effects and the Within Transformation.

a. Premultiplying (12.11) by Q one gets Qy = «Qint + QX" + QZpp + Qv

But PZp = Zp and QZp = 0. Also, PiNT = iNT and Qint = 0. Hence, this

transformed equation reduces to (12.12)

Qy = QX" + Qv

Now E(Qv) = QE(v) = 0 and var(Qv) = Q var(v)Q0 = o2Q, since var(v) = ov2Int

and Q is symmetric and idempotent.

b. For the general linear model y = X" + u with E(uu0) = Й, a necessary and sufficient condition for OLS to be equivalent to GLS is given by X0 fi_1PX where PX = I – PX and PX = X(X0X)_1 X0, see Eq.(9.7) of Chap.9. For Eq. (12.12), this condition can be written as

(X0Q)(Q/o2)P qx = 0

using the fact that Q is idempotent, the left hand side can be written as (X0Q)P qx/ov2

which is clearly 0, since PqX is the orthogonal projection of QX.

One ca...

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