Inference for Dynamic Panels with Threshold Effect and Endogeneity
This paper addresses an important issue of modelling nonlinear asymmetric dynamics and unobserved individual heterogeneity in the threshold panel data framework, simultaneously. As a general approach, we develop the fi..rst differenced GMM estimator, which allows both threshold variable and regressors to be endogenous. When the threshold variable becomes strictly exogenous, we propose a more efficient two step least squares estimator. We provide asymptotic theory and develop the testing procedure for threshold effects and the threshold variable exogeneity. Monte Carlo studies provide a support for theoretical predictions. We present an empirical application investigating an asymmetric sensitivity of investment to cash +flows.