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Standard Errors for Two-Way Clustering with Serially Correlated Time Effects

Harold D. Chiang¹; Bruce E. Hansen²; Yuya Sasaki³

¹ Department of Economics, University of Wisconsin-Madison, William H. Sewell Social Science Building, 1180 Observatory Drive, Madison, WI 53706-1393, USA [email protected] · ² Department of Economics, University of Wisconsin-Madison, William H. Sewell Social Science Building, 1180 Observatory Drive, Madison, WI 53706-1393, USA [email protected] · ³ Department of Economics, Vanderbilt University, VU Station B #351819, 2301 Vanderbilt Place, Nashville, TN 37235-1819, USA [email protected]

Abstract We propose improved standard errors and an asymptotic theory for two-way clustered panels. Our theory allow for arbitrary serial dependence in the common time effects, which is excluded by existing two-way methods. Our asymptotic distribution theory is the first which allows for this level of inter-dependence. Under weak conditions, we demonstrate that OLS is asymptotically normal, our proposed variance estimator is consistent, and t-ratios are asymptotically standard normal. The results extend to two-way fixed-effect models; we argue that two-way clustering is still necessary even if two-way fixed effects are included. Simulation and empirical illustration are provided.

DOI

10.1162/rest_a_01507

Pages

1-40

Language

en

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