Maximum Likelihood Estimation of Dynamic Panel Threshold Models

Threshold estimation methods are developed for dynamic panels with individual fixed specific effects covering short time periods. Maximum likelihood estimation of the threshold and the slope parameters is proposed using first difference transformations. Threshold estimate is shown to be consistent and it converges to a double-sided standard Brownian motion distribution, when the number of individuals grows to infinity for a fixed time period; and the slope estimates are consistent and asymptotically normally distributed. The method is applied to a sample of 72 countries and 8 periods of 5-year averages to determine the effect of inflation rate on long-run economic growth.