Hello. I am estimating a regression between the GDP and social spending of municipalities and I am trying to insert a dummy variable for municipalities in the metropolitan region (municipalities in the metropolitan region = 1; municipalities outside the metropolitan region = 0). But Eviews is displaying the near matrix error message when I use a panel regression for fixed effects or random effects, and when I select neither effect, the error message does not appear. However, when I analyze the correlation matrix, it is clear that there is no perfect correlation between the dummy variable and the other variables in the equation. What could be causing this error?
The equation is LogGDP = LogEducation LogHealth DummyGV
Dummy near matrix error
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- Non-normality and collinearity are NOT problems!
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Re: Dummy near matrix error
Are the fixed effects perfectly correlated with the municipality dummy?
Re: Dummy near matrix error
I think so because in the none specification effects or random effects format the error message does not appear. Although the panel data tests (chow, breusch-pagan, and hausman) tell me to estimate the panel in fixed effects.
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- Non-normality and collinearity are NOT problems!
- Posts: 3775
- Joined: Wed Sep 17, 2008 2:25 pm
Re: Dummy near matrix error
I believe that EViews is telling you correctly that you can't have both the municipality dummy and cross-section fixed effects. Dummy variable trap.
Re: Dummy near matrix error
Okay. So is it just discarding the variable? It is not essential for regression, I was just looking to see if it would make any difference whether the municipality was in the metropolitan region or not. Thank you for your attention.
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- Non-normality and collinearity are NOT problems!
- Posts: 3775
- Joined: Wed Sep 17, 2008 2:25 pm
Re: Dummy near matrix error
You can't estimate an intercept for each region and then also separately estimate the effect of being in a metropolitan region. So yes, you probably want to delete the dummy.
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