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Disentangling Age, Cohort and Time Effects in the Additive Model

  • David J. McKenzie

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. Copyright 2006 Blackwell Publishing Ltd.

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Article provided by Department of Economics, University of Oxford in its journal Oxford Bulletin of Economics and Statistics.

Volume (Year): 68 (2006)
Issue (Month): 4 (08)
Pages: 473-495

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Handle: RePEc:bla:obuest:v:68:y:2006:i:4:p:473-495
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  1. James Heckman & Edward Vytlacil, 2000. "Identifying the Role of Cognitive Ability in Explaining the Level of and Change in the Return to Schooling," NBER Working Papers 7820, National Bureau of Economic Research, Inc.
  2. Nijman, T.E. & Verbeek, M.J.C.M., 1993. "Minimum MSE estimation of a regression model with fixed effects from a series of cross sections," Other publications TiSEM 34c1104a-a64b-4030-be99-b, Tilburg University, School of Economics and Management.
  3. Hausman, Jerry A. & Taylor, William E., 1981. "Panel data and unobservable individual effects," Journal of Econometrics, Elsevier, vol. 16(1), pages 155-155, May.
  4. David J. McKenzie, 2001. "The Household Response to the Mexican Peso Crisis," Working Papers 01017, Stanford University, Department of Economics.
  5. Denton, Frank T & Mountain, Dean C & Spencer, Byron G, 1999. "Age, Trend, and Cohort Effects in a Macro Model of Canadian Expenditure Patterns," Journal of Business & Economic Statistics, American Statistical Association, vol. 17(4), pages 430-43, October.
  6. Tullio Jappelli, 1999. "The Age-Wealth Profile and The Life-Cycle Hypothesis: a Cohort Analysis with a Time Series of Cross-Sections of Italian Households," CSEF Working Papers 14, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.
  7. Verbeek, M. & Nijman, T., 1992. "Minimum MSE Estimatin of a Regression Model with Fixed Effects from a Series of Cross Sections," Papers 9201, Tilburg - Center for Economic Research.
  8. Dolores Collado, M., 1997. "Estimating dynamic models from time series of independent cross-sections," Journal of Econometrics, Elsevier, vol. 82(1), pages 37-62.
  9. Deaton, A. & Paxson, C., 1993. "Intertemporal Choice and Inequality," Papers 168, Princeton, Woodrow Wilson School - Development Studies.
  10. Deaton, Angus, 1985. "Panel data from time series of cross-sections," Journal of Econometrics, Elsevier, vol. 30(1-2), pages 109-126.
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