Threshold regression with endogeneity for short panels

This paper considers the estimation of dynamic threshold regression models with fixed effects using short panel data. We examine a two-step method, where the threshold parameter is estimated nonparametrically at the N-rate and the remaining parameters are estimated by GMM at the √N-rate. We provide simulation results that illustrate advantages of the new method in comparison with pure GMM estimation. The simulations also highlight the importance of the choice of instruments in GMM estimation.