knitr::opts_chunk$set( collapse = TRUE, comment = "#>" )
penppml
is an R package that enables users to fit penalized Poisson Pseudo Maximum Likelihood (PPML) regressions with high-dimensional fixed effects (HDFE). Supported penalties in the current version are ridge and lasso. The original application that motivated the development of penppml
was the estimation of three-way gravity models of trade with a large number of PTA provision dummies (Breinlich, Corradi, Rocha, Ruta, Santos Silva and Zylkin, 2021).
To install and load penppml
, you can use the following commands:
install.packages(penppml)
library(penppml)
The penppml
package features the trade
data set, which integrates panel data on bilateral trade flows with information about specific provisions in trade agreements for 220 exporters and 270 importers. The provisions included in the package are a subset of 16 out of 305 "essential" provisions featured in the full data set. More information about the data set and the variables is included in the corresponding help file, accessible via ?trade
.
knitr::kable(head(trade[, 1:10], 10), format = "pipe", caption = "Table 1: International Trade Data Set")
Along with the trade
data set, the package includes an auxiliary data frame, countries
, which contains basic information about the country ISO codes included in the main data set.
knitr::kable(head(countries, 10), format = "pipe", caption = "Table 2: Country Data Set",)
This enables users to easily filter by region or subregion. For instance, if we want to restrict our analysis to countries in the Americas, we can do the following:
selected <- countries$iso[countries$region %in% c("Americas")] trade2 <- trade[(trade$exp %in% selected) & (trade$imp %in% selected), -(5:6)] # We remove columns 5 and # 6 because these variables are not needed in our regressions.
We will show the capabilities of this package using the filtered trade2
data frame.
The package enables users to run unpenalized PPML regressions with HDFE, using the hdfeppml
function as follows:
reg1 <- hdfeppml(data = trade2, dep = "export", fixed = list(c("exp", "time"), c("imp", "time"), c("exp", "imp")))
As we can see, the function is designed to be data-frame-friendly: the user sets a data frame of reference in the data
argument and then picks the dependent, independent and fixed effect variables either by name or by column number within the provided data frame. Also, note the following points about the syntax:
The fixed
argument can take either a single vector (just like the dep
argument; each element will be used as a separate fixed effect) or a list of vectors. The latter option is useful in cases where the desired fixed effect is the result of the interaction of two or more variables, as in the gravity model of trade. In those cases, you can specify any number of separate fixed effects in distinct elements of the list and, inside each element, which variables in the data set you want to interact.
As explained in the note, if indep
is empty, the function uses all remaining columns in the data frame by default.
Internally, the function will do the necessary transformations of the columns into vectors and matrices, as needed by the algorithm.
Alternatively, more advanced users who prefer to handle data transformations themselves can use the internal function hdfeppml_int
. For more information and examples on this issue, run ?hdfeppml
or ?hdfeppml_int
. Note also that this applies to all of the main functions in our package: both the data-frame-friendly wrapper and the internal function are available for use.
The results of our PPML model are:
results <- data.frame(prov = rownames(reg1$coefficients), b = reg1$coefficients, se = 0) results$se[!is.na(reg1$coefficients)] <- reg1$se results
results <- data.frame(prov = rownames(reg1$coefficients), b = reg1$coefficients, se = 0) results$se[!is.na(reg1$coefficients)] <- reg1$se knitr::kable(list(results[1:8, ], results[9:16, ]), format = "pipe", col.names = c("Provision", "Coefficient", "SE"), caption = "Table 3: Unpenalized PPML results", row.names = FALSE, digits = 4)
(Note that the functions is automatically dropping perfectly collinear variables from the estimation algorithm and reporting NA
as the coefficient.)
The mlfitppml
function is a flexible tool for computing penalized PPML regressions with HDFE. For instance, if we want to fit a PPML regression with a lasso penalty for several values of the penalty parameter (lambda) at once, we can run:
lambdas <- c(0.05, 0.025, 0.01, 0.0075, 0.005, 0.0025, 0.001, 0.00075, 0.0005, 0.00025, 0.0001, 0) reg2 <- mlfitppml(data = trade2, dep = "export", fixed = list(c("exp", "time"), c("imp", "time"), c("exp", "imp")), penalty = "lasso", lambdas = lambdas)
The function returns a list that contains two sets of coefficients for each value of lambda: the penalized coefficients (in the beta_pre
element) and the post-penalty or unpenalized coefficients (in the beta
element; these are calculated by estimating a post-penalty regression with just the selected variables). We can plot the regularization path of the penalized coefficients as follows:
results <- as.data.frame(reg2$beta_pre) names(results) <- lambdas results$provision <- row.names(results) results <- reshape2::melt(results, id.vars = "provision", variable.name = "lambda", value.name = "coefficient") results$lambda <- as.numeric(as.character(results$lambda)) ggplot2::ggplot(data = results, mapping = ggplot2::aes(x = lambda, y = coefficient, col = provision)) + ggplot2::geom_line(show.legend = FALSE) + ggplot2::scale_x_reverse(expand = ggplot2::expansion(add = c(0, 0.015))) + ggplot2::theme_classic() + directlabels::geom_dl(ggplot2::aes(label = provision), method = list(directlabels::dl.trans(x = x + 0.5), "last.bumpup")) + ggplot2::labs(x = "Penalty parameter (lambda)", y = "Coefficient", title = "Figure 1: Regularization path for lasso")
If the user wishes to obtain the penalized estimates for a single value of lambda, they can either use mlfitppml
as described above (just setting lambdas == x
, where x
is a number) or use the penhdfeppml
function, upon which mlfitppml
is built, directly. For instance:
reg3 <- penhdfeppml(data = trade2, dep = "export", fixed = list(c("exp", "time"), c("imp", "time"), c("exp", "imp")), penalty = "lasso", lambda = 0.005)
We can easily check that the penalized coefficient estimates of penhdfeppml
and mlfitppml
are equal for a lambda value of 0.005 (within a numerical tolerance):
all.equal(as.vector(reg3$beta[!is.na(reg3$beta)]), as.vector(reg2$beta_pre[, 5]), tol = 1e-05)
For more details on penhdfeppml
, run ?penhdfeppml
.
mlfitppml
also allows user to use the ridge penalty in their PPML regressions. Simply run:
lambdas <- seq(0.0001, 0, length.out = 10) reg4 <- mlfitppml(data = trade2, dep = "export", fixed = list(c("exp", "time"), c("imp", "time"), c("exp", "imp")), penalty = "ridge", lambdas = lambdas)
Note that this feature is still in development and may contain bugs.
The mlfitppml
function enables users to carry out cross-validation of their models via the xval
and IDs
arguments. When xval
is set to TRUE
, the function performs cross-validation using a user-provided vector of IDs. For instance, if we want to do k-fold cross validation with k = 20, splitting the data set by agreement (not by observation), we can do the following:
id <- unique(trade[(trade$exp %in% selected) & (trade$imp %in% selected), 5]) nfolds <- 20 unique_ids <- data.frame(id = id, fold = sample(1:nfolds, size = length(id), replace = TRUE)) cross_ids <- merge(trade[(trade$exp %in% selected) & (trade$imp %in% selected), 5, drop = FALSE], unique_ids, by = "id", all.x = TRUE)
Now we activate the cross-validation option in mlfitppml
and input the ID vector:
reg5 <- mlfitppml(data = trade2, dep = "export", fixed = list(c("exp", "time"), c("imp", "time"), c("exp", "imp")), penalty = "lasso", lambdas = c(seq(0.5, 0.1, by = -0.1), 0.05, 0.01, 0.005, 0.001, 0.0005, 0.0001, 0), xval = TRUE, IDs = cross_ids$fold)
Now the function also returns a rmse
element that includes the cross-validation results (the average RMSE or root mean squared error for each value of lambda). Users can employ this tool to choose the value of the penalty parameter that minimizes the RMSE:
reg5$rmse
# Note for package maintainer: notice that the code above is not being evaluated when building the vignette (due to the eval = FALSE option). This is for convenience: the cross-validation algorithm takes forever to run and, since vignettes are rebuilt a couple of times every time R CMD check is run, this makes it too cumbersome to check the package. Instead, I've run the code above in a separate R session and stored the results, which I'm reproducing below (re-running the code above should produce similar results): rmse <- structure(list(lambda = c(0.5, 0.4, 0.3, 0.2, 0.1, 0.05, 0.01, 0.005, 0.001, 5e-04, 1e-04, 0), rmse = c(108.581317035247, 108.581317035247, 108.581317035247, 108.581317035247, 108.581317035247, 108.581317217437, 108.575034620904, 108.574325753172, 108.573959604138, 108.573944149073, 108.573933541391, 108.573931664275)), class = "data.frame", row.names = c(NA, -12L)) knitr::kable(rmse, format = "pipe", col.names = c("Penalty (lambda)", "RMSE"), caption = "Table 4: Cross-validation results", row.names = FALSE, digits = 4)
In this case, the RMSE criterion suggest that the penalty should be set at 0. In other words, the results in Table 3 are the ones that minimize the mean squared error of the regression, according to 20-fold cross-validation.
This package also enables the use of the plugin lasso method, incorporating coefficient-specific penalty weights calculated automatically by the package. The most convenient way to do this is to set method = "plugin"
in mlfitppml
. Note that the plugin algorithm requires a clustering variable - we are using the interaction of the exporter and importer variables in the trade
data set:
reg6 <- mlfitppml(data = trade2, dep = "export", fixed = list(c("exp", "time"), c("imp", "time"), c("exp", "imp")), penalty = "lasso", method = "plugin", cluster = c("exp", "imp"))
results <- data.frame(prov = rownames(reg6$beta), b_pre = reg6$beta_pre, b = reg6$beta, se = 0) results$se[!is.na(reg6$beta)] <- reg6$ses results
knitr::kable(list(results[1:7,], results[8:14,]), format = "pipe", col.names = c("Provision", "Lasso Coefficient", "Post-Lasso Coefficient", "SE"), caption = "Table 5: Plugin Lasso results", row.names = FALSE, digits = 4)
We can see that the plugin lasso is very strict: only two provisions have non-zero coefficients when the penalties are set at the level suggested by the plugin algorithm. Compare this to the cross-validation results, which didn't remove any of the provisions.
This package also allows users to implement the two-step lasso described in Breinlich et al. (2021). This method consists in, first, running a plugin lasso estimation and second, running individual lasso regressions on each of the variables selected in the first stage. The iceberg
function is designed precisely with this second step in mind. It takes a vector of dependent variables and returns a lasso regression for each one of them:
iceberg_results <- iceberg(data = trade2[, -(1:4)], dep = results$prov[results$b != 0], selectobs = (trade2$time == "2016"))
Currently, the function returns a matrix with coefficient estimates for each of the selected provisions. Support for standard errors (including clustered) is in development as of the current version of the package. The iceberg lasso coefficients are:
iceberg_results
knitr::kable(iceberg_results, format = "pipe", caption = "Table 6: Iceberg Lasso coefficients", row.names = TRUE, digits = 4)
Since PPML coefficients can't be easily interpreted, you may find it useful to see the raw correlations between the variables in the iceberg lasso step:
provcorr <- cor(trade2[, results$prov]) (provcorr <- provcorr[, results$prov[results$b != 0]])
knitr::kable(provcorr, format = "pipe", caption = "Table 7: Iceberg Lasso correlations", row.names = TRUE, digits = 4)
Breinlich, H., Corradi, V., Rocha, N., Ruta, M., Santos Silva, J.M.C. and T. Zylkin, T. (2021). "Machine Learning in International Trade Research: Evaluating the Impact of Trade Agreements", Policy Research Working Paper; No. 9629. World Bank, Washington, DC.
Correia, S., P. Guimaraes and T. Zylkin (2020). "Fast Poisson estimation with high dimensional fixed effects", STATA Journal, 20, 90-115.
Gaure, S (2013). "OLS with multiple high dimensional category variables", Computational Statistics & Data Analysis, 66, 8-18.
Friedman, J., T. Hastie, and R. Tibshirani (2010). "Regularization paths for generalized linear models via coordinate descent", Journal of Statistical Software, 33, 1-22.
Belloni, A., V. Chernozhukov, C. Hansen and D. Kozbur (2016). "Inference in high dimensional panel models with an application to gun control", Journal of Business & Economic Statistics, 34, 590-605.
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