When I check the VIF of my independent variables with the dependent variable, it looks normal and less than 5 but when I add the interaction variables, the VIF increase to 48 for some variables.

I read that centering or creating zscore (standardized values) for the variables are two of the solutions to the problem, but I can't seem to find any article that did that.

I am doing panel data analysis with fixed model. Four continuous independent variables are interacted with a continuous variable and also with a year dummy in another model

what should I do? thank you in advance


Collinearity problems with interactions are common. Not only are interactions collinear with other interactions they are often collinear with main effects and omitted main effects. There is very little that can or should be done about this. Sometimes a variable clustering analysis can help you in understanding the problem. The bottom line: assessing interactions is a difficult problem due to lack of precision and power. Interactions are probably the most important aspect of the model to pre-specify using subject matter considerations.

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