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Good afternoon,

The following questions are to essentially check whether I am carrying out the correct econometric regressions free from any errors before computing them on Stata to get some results. Please note that this is my first time doing any econometric analysis on my own accord.

Just to provide some context, I am looking at the effect of macroeconomic uncertainty on trade balance in the Euro Area, using quarterly data between 1999 - 2015 (67 quarters) on 17 Euro Area countries. As most of the variation in my data is time variance rather than cross-sectional variance, I am conducting a log differenced fixed effects regression (with the exception of macroeconomic uncertainty, which I am only taking the log of (not log difference), for theoretical reasons) in order to avoid the time series issue of non-stationarity. I am also including time fixed effects. I will be computing the regression first with import growth as my outcome variable, and then with export growth as my outcome variable, and then with net export growth as my outcome variable (each with their own corresponding specification). Please find a screenshot of these three regressions attached below, where "FE" denotes "Fixed Effect" and Q_t is the quarterly dummy for a specific quarter t.

enter image description here

My questions are:

  1. Generally speaking, do my regressions raise any red flags or concerns at all? Does anything need tweaking or need to be expressed differently before including it as below in my study?

  2. Does there seem to be any issues of endogeneity in any of these regressions?

  3. I have included all control variables from my import growth regression in my export growth regression too, purely based on the fact that imported capital often serves as an input into the export production process, and therefore these import growth control variables may also have an indirect effect on export growth; is repeating these controls in my export growth regression (based on this reasoning alone) valid? Does doing this raise any issues econometrically?

  4. I also have two time fixed control variables, real effective exchange rate and trade barriers (both identical cross-sectionally due to all nations being in the Euro Area) and it is my understanding that my quarterly dummies will encompass their effects; does that mean there is no need for me to specify them at all, and more specifically does this mean that the part in brackets under each regression (where I have specified the time fixed effect) is correct, or should I have added these two variables and corresponding coefficients in there too? Also, if I am not specifying these two control variables because they are time fixed, does that mean I do not need to collate data for them and include them in my dataset?

  5. I am using investment as a proxy for export capacity due to a lack of data availability of the latter and as the former is a key determinant, is this valid?

  6. When I am explaining the reasoning for including each control variable, does it matter if the transmission mechanism of the relationship between that control variable and dependent variable occurs through another control variable in your regression?

  7. Now that I have log differenced all my variables (except macroeconomic uncertainty) to remove any chance of non-stationarity, are there any further time series econometric issues that I need to consider or deal with?

  8. Is it viable to include both GDP growth and investment growth as control variables I.e. from a perspective of collinearity?

  9. The reasoning behind my inclusion of the interaction term between FDI growth and log macroeconomic uncertainty is that the effect of a 1% increase in macroeconomic uncertainty on import growth will be greater at higher levels of FDI growth, due to (theoretically) higher levels of FDI growth leading to greater rates of technological transfers, job creation etc in the host country which allows consumers to react more efficiently to macroeconomic uncertainty and adjust their imports accordingly, thus having a greater effect on import growth; does this reasoning seem valid?

  10. I have decided to log difference inflation as well because the theoretical relationship seems to have been between inflation and import levels and so, due to the nature of this relationship, I thought that if I log difference the latter then I'd have to log difference the former; however do you think it would be more intuitive to keep inflation as it is rather than taking the natural log?

I know that these questions do not really relate to Stata per se and rather pertain to econometric methods and general theory, however I would be extremely grateful if you could offer any opinions and thoughts whatsoever as I do not have anybody in particular to turn to for guidance before moving onto the Stata stage, and therefore any constructive criticism and nudges in the right direction based on your own viewpoints of the above would give me great peace of mind when conducting my analysis on Stata. I apologise for the numerous questions too, some of which will probably be silly and/or basic questions, and I appreciate anybody taking the time out to answer or offer their thoughts on any number of these questions.

Many many thanks,

Ley

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