I am planing a panel data analysis evaluating a continuous policy intervention. I do have individual level data. I would like to account for individual fixed-effects. However, the explanatory variable does not vary on individual level, but only on state level. The response variable is on individual level. Is that a problem?
If you want to do unit-fixed effects (so eliminating any unobserved variable that varies cross-sectionally but remains the same over time), this should not be a problem, at least assuming that your explanatory variable varies over time (be it a dummy that is 1 in the year the policy was administered and 0 otherwise, or a continuous variable that changes over time according to the intensity of the policy treatment).
It does not matter that the variable is on state level, as long as the policy varies over time. However, if you only have individual observations for the one state that introduced the policy, you will not be able to interpret your results counterfactually. For that you would need similar individuals observed over the same period of time in a state that did not introduce the policy (and apply difference-in-difference or something of the sort).