Panel Smooth Transition Regression model and an application to investment under credit constraints

We develop a non-dynamic panel smooth transition regression model with individual flxed efiects. In this model the parameters are allowed to change smoothly as a function of an exogenous variable. The model can be viewed as an alternative to the threshold panel model by Hansen (1999a). We extend the modelling strategy for smooth transition models to the panel framework. Tests for parameter constancy and no remaining nonlinearity are proposed. Small-sample properties of these tests are investigated by simulation. The results indicate that the proposed tests are applicable in small samples. A panel smooth transition model is specifled and fltted to the same data set as the one used in Hansen (1999a) who investigated whether flnancial constraints afiect flrms’ investment decisions. The estimated model is evaluated and the flndings discussed.