Dears,
In my panel data analysis, I am using interaction term. The model looks something like Y=b0+b1*X+b2*Z+ b3*XZ+e.
Now the interaction term is strongly correlated with X or Z. In order to get around this problem, I read in Azman et al. (2010) and Burill (2007), that I can follow the following proceducer....
reg XZ X Z
then predict errors e_XZ and use these errors instead of XZ.
I did that and its great to see that e_XZ is obviously not correlated with X or Z at all. However, I was expecting e_XZ to be strongly correlated with XZ and thus would justify it usage. However, its not so strongly correlated.
Does anyone have any suggestions please? Should I use it? Is it a problem that e_XZ and XZ are not so strongly correlated and I am using it?
Thank you very much in advance
Arshad
p.s. @majte, I read your post regarding corr(y, u^) and I think you might be able to help with my question here. thanks
links to the referred papers: http://minitab.com.au/uploadedFiles/...regression.pdf https://www.sciencedirect.com/scienc...64999310000635
