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Disentangling Age, Cohort and Time Effects in the Additive Model

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  • David J. McKenzie

Abstract

This paper presents a new approach to the old problem of linear dependency of age, cohort and time effects. It is shown that second differences of the effects can be estimated without any normalization restrictions, providing information on the shape of the age‐, cohort‐ and time‐effect profiles, and enabling identification of structural breaks. A Wald test is provided to test the popular linear and quadratic specifications against a very general alternative. The method is illustrated through examples which show its ability to detect structural breaks in time effects as a result of the Mexican peso crisis, and to determine whether the age‐effect profile in the variance of Taiwanese log consumption is concave or convex.

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  • David J. McKenzie, 2006. "Disentangling Age, Cohort and Time Effects in the Additive Model," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 68(4), pages 473-495, August.
    • Handle: RePEc:bla:obuest:v:68:y:2006:i:4:p:473-495
    DOI: 10.1111/j.1468-0084.2006.00173.x
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    1. Hausman, Jerry A & Taylor, William E, 1981. "Panel Data and Unobservable Individual Effects," Econometrica, Econometric Society, vol. 49(6), pages 1377-1398, November.
    2. David J. McKenzie, 2006. "Disentangling Age, Cohort and Time Effects in the Additive Model," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 68(4), pages 473-495, August.
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    7. Dolores Collado, M., 1997. "Estimating dynamic models from time series of independent cross-sections," Journal of Econometrics, Elsevier, vol. 82(1), pages 37-62.
    8. David J. McKenzie, 2001. "The Household Response to the Mexican Peso Crisis," Working Papers 01017, Stanford University, Department of Economics.
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