Introduction to Kinked Regression and Application

Abstract

Kinked regression is a powerful econometric method for capturing the structural changes or threshold effects in variable relationships. It allows for shifts in the slope at a specific threshold, the kink point, while ensuring continuity of the dependent variable. This approach is useful for analyzing changes in behavioral or policy responses at critical levels, such as household savings reacting to interest rate thresholds or central bank interventions losing effectiveness beyond inflation targets. Kinked regression can analyze nonlinear dynamics by accommodating piecewise linear relationships and maintaining mathematical continuity. Its broad applications span labor economics, finance, and policy evaluation, providing insights into variable interactions under different regimes or thresholds. This research note provides basic STATA and R codes to implement kinked regression.

Keywords: Kinked regression, Threshold, Nonlinearity, STATA, R