Threshold estimation methods are developed for dynamic panels with individual specific fixed effects covering short time periods. Maximum likelihood estimation of the threshold and slope parameters is proposed using first difference transformations. Threshold estimate is shown to be consistent and its asymptotic distribution is nonstandard when the number of individuals grows to infinity for a fixed time period; the slope estimates are consistent and asymptotically normally distributed. The method is applied to a sample of 74 countries and 11 periods of 5-year averages to determine the effect of inflation rate on long-run economic growth.
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I am indebted to Bruce Hansen for his guidance, discussions, and suggestions in this project. I also would like to thank Jack Porter, Andrés Aradillas-López, Xiaoxia Shi, Chunming Zhang, Arthur Lewbel, Antonio Galvao, David Jacho-Chávez, Esfandiar Maasoumi, and the two anonymous referees as well as the participants of the 2014 Annual Meeting of the Latin American Econometric Society (Sao Paulo, Brazil), 2012 Meeting of the Midwest Econometric Group (Lexington, KY), Central Bank of Peru Research Seminar and the University of Wisconsin-Madison Econometrics Workshop, Lunch Seminar and Reading Group for their discussions and useful comments. Special thanks to Patricia Paskov for proofreading the paper. All remaining errors are mine.
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