Fixed Effect - Constant Term in Regression

Dear all,

I have a question relating to fixed effect. I have encounter it many times in quantitative macro paper. For example, like in the following picture from a paper by Ottonello & Winberry.

As you can see, in the regression equation, they put two constant terms \alpha_j and \alpha_{st}, saying that which are firm and sector fixed effects respectivily.

So I am a bit confused, are they indeed dummy variables, for example \alpha_j will be 1 for firm j and 0 otherwise? I mean the dummy variables which are often used to kill fixed effects?

Is there anyone having an idea? Really appreciate!

Thank you,

Hi,

Is this question related to Dynare?

Best,
Stéphane.

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This is clearly not related to Dynare. But the fixed effects are indeed dummy variables. \alpha_j=1 will be one for firm j at all points in time and 0 otherwise. \alpha_{st} is a set of dummies depending on time t and sector s. If there are S sectors and T time periods, then you have S\times T dummies that are 1 if a firm j belongs to sector s and the time period is t and 0 otherwise

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