Fixed-effect panel threshold model using Stata

Threshold models are widely used in macroeconomics and financial analysis for their simple and obvious economic implications. With these models, however, estimation and inference is complicated by the existence of nuisance parameters. To combat this issue, Hansen (1999, Journal of Econometrics 93: 345 368) proposed the fixed-effect panel threshold model. In this article, I introduce a new command (xthreg) for implementing this model. I also use Monte Carlo simulations to show that, although the size distortion of the threshold-effect test is small, the coverage rate of the confidence interval estimator is unsatisfactory. I include an example on financial constraints (originally from Hansen [1999, Journal of Econometrics 93: 345-368]) to further demonstrate the use of xthreg.