How can I know whether my data requires static panel data analysis or dynamic panel data analysis?

[Gabriel Temesgen]

Hello Everyone, Is there any testing mechanism or knowing panel data analysis requires static analysis (random effect and/ or fixed effect) or dynamic analysis (pmg/ mg/ dfe/..)? most papers I read, directly go for dynamic analysis and select dynamic panel models. How can I say my data is static/ dynamic? Is there any testing mechanism in STATA? can someone share me the codes? Thanks

[Joao Santos Silva]

Dear Gabriel Temesgen,

The choice between static and dynamic model depends more on what you want to estimate than on any statistical properties of the data. Suppose you want to estimate a standard wage equation where wages are explained by education, should the model be dynamic? If you estimate a dynamic model you may well find that the lagged wage is very significant but education is not, leading you to conclude that education does not affect wages and that the main determinant of wages is previous wage. This would be a very silly conclusion for obvious reasons (lagged wage is masking the effect of education). Suppose now that you want to predict next year's wages; now it would be silly to ignore the information provided by the current wage.

In short, rather than doing a statistical test, think carefully about the problem and decide for yourself which approach is more suitable.

Best wishes,

Joao