I have data for 300 firm for 15 years. I want to develop a model using three firm specific variables (panel data) and two macro economic variables (Time Series data). Can I use all five independent variables in a same variable?
hi dear. yes you can use the panel data, but you should repeat the time series data of dependent variable for each section(firms).
In most econometric models such as this what econometricians call a fixed effects panel model is appropriate If you are using such a fixed effects panel model you can only use the firm specific variables along with panel and year dummies. The effect of the macro variables is included in the heterogeneity covered by the dummies.
the purpose of econometric panel analysis is to estimate the effect of the firm specific variables. Is this what you are trying to do. If you need to estimate firm specific values for the coefficients of the macro variables you are look at estimating another 600 coefficients - what would they mean. You should ask what are the questions that you wish to answer. One might then be better able to advise you on the appropriate procedures. My bible on panel data is Wooldridge (2010), Econometric Analysis of Cross section and panel data, 2nd ed. MIT Press. If you find this difficult have a look at his Introductory text.
As long as each variable is across sections (in your case firms) and across time (in your case 15 years) you can definitely use 5 explanatory (independent) variables. However, if you have a variable that is only across time (i.e., constant across firms) then you can use it, but if you have more than one such variable you may arrive at issues where you will have two (fixed) period effects.
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