Consider a basic linear unobserved effect panel data model, e.g.: $$Y_{it}=\beta x'_{it}+c_i+\lambda_t+u_{it}, \quad t=1,\dots,T$$ where the vector $x_{it}$ contains the independent variables and $u_{it}$ is an error term. Number of individuals is $N$. Assume that the the unobserved individual effect $c_i$ may be correlated with $x_{it}$ (fixed effects assumption).
First question: What is the difference between a "one-way" and a "two-way" model? Wooldridge (2006 & 2010) never uses this terms. I assume a one-way model does not include time effects, e.g.: \begin{equation}Y_{it}=\beta x'_{it}+c_i+u_{it}, \quad t=1,\dots,T \quad(1)\end{equation} but a two-way model additionally does include time effects : \begin{equation} Y_{it}=\beta x'_{it}+c_i+\lambda_t+u_{it}, \quad t=1,\dots,T \quad(2) \end{equation}
According to the Frisch-Waugh-Lovell theorem the within estimator and the least squares dummy variable (LSDV) estimator both yield the same coefficients for equation (1).
This leads me to my second question: How would you estimate equation (2)? Can you first include $T$ time dummies (should it be $T-1$?) and then choose between the within estimator or the LSDV estimator? This answer suggests to first use the within transformation and afterwards to estimate the model including dummy variables, what I find confusing.
References:
Wooldridge, J. M. (2006). Introductory econometrics (3rd ed.). Thomson/South-Western.
Wooldridge, J. M. (2010). Econometric analysis of cross section and panel data (2nd ed.). The MIT Press.
EDIT:
I had a look at some lecture notes (here, here and here) and it seems like two-way models include what are sometimes called "time (fixed) effects" (see $\lambda _t$ in equation (2)), as I assumed.
What I understood was that either a) a somewhat different within transformation can be applied to two-way models, or b) dummies are included for one dimension (either time or individual) and then the "normal" within transformation (subtracting means) for the other dimension is applied.
Depending on estimation procedure the standard errors have to be corrected because of different degrees of freedom. Also, procedure a) seems only to be valid for balanced panels. I haven't found a textbook reference yet.