Fixed effects panel with lagged independent variable

[Rey Ir]

Hi all,

I have a panel dataset and want to use fixed effects. My dependent variable is Gini, and I have five independent variables, one of which is trade openness. I know that trade openness will not immediately impact Gini.
My question is, would it be appropriate for the fixed-effects model if I were to lag the trade openness and use L5.trade openness (instead of no lag), along with the other control variables? Is there a better way to approach this?

Thank you very much for any help!

[Carlo Lazzaro]

Rey:
welcome to this forum.
Lagging sounds appropriate, but you do not provide ebough details to vet if L.5 is actually the way to go with your data.

[Rey Ir]

Hi Carlo,

Thank you very much for your help.
My study aims to find if trade openness impacts income inequality. I have other variables to control for, such as FDI, GDP per capita, inflation, etc.
I know that changes in trade openness will not immediately reflect on the Gini index, but I am not sure how to decide how many lags is best appripate for the fixed effects model.
I am new to this field, so any guidance is appreciated!

Thanks again,
Rey

[Carlo Lazzaro]

Rey:
the best guidance I can provide you with is skimming through the (good) literature in your research field and see what others did when presented with the very same research question.
Surely Joao Santos Silva has better insights than me about this issue.

[Rey Ir]

Hi again,
Thank you for your help!