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I'm just beginning to learn econometrics, and I just learned about the fixed effects estimator, and the first-difference estimator. It's quite straightforward that those techniques allow me to control for time-invariant unobserved heterogeneity.

However, I cannot stop wondering: What if an omitted variable is time-varying? How can I take care of that problem?

I would appreciate an overall answer without any sophisticated explications.

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  • $\begingroup$ This question seems clear enough to me. I'm voting to leave open. $\endgroup$ – gung Apr 16 '17 at 1:16
  • $\begingroup$ it is possible to include time fixed effect in the model instead of case fixed effect. This way all the case-invariant but time-varying heterogeneity will drop out. $\endgroup$ – carl_pch Apr 16 '17 at 2:20

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