On the Properties of Various Estimators for Fiscal Reaction Functions

This paper evaluates the bias of the least-squares-with-dummy-variables (LSDV) method in fiscal reaction function estimations. A growing number of studies estimate fiscal policy reaction functions-that is, relationships between the primary fiscal balance and its determinants, including public debt a...

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Hauptverfasser: Celasun, Oya, Kang, Joong Shik
Format: E-Book Buch
Sprache:Englisch
Veröffentlicht: Washington International Monetary Fund 01.07.2006
Ausgabe:1
Schlagworte:
Budget Deficits
Domestic Debt
Dynamic Models
Econometric models
Economic Models
Fiscal policy
Fiscal Reaction Functions
Panel Data
Single Variables: Models with Panel Data
Single Equation Models
National Debt
Debt Management
National Deficit Surplus
ISBN:9781451989007, 1451864426, 1451989008, 1452723907, 9781452723907, 9781451864427
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Abstract This paper evaluates the bias of the least-squares-with-dummy-variables (LSDV) method in fiscal reaction function estimations. A growing number of studies estimate fiscal policy reaction functions-that is, relationships between the primary fiscal balance and its determinants, including public debt and the output gap. A previously unexplored methodological issue in these estimations is that lagged debt is not a strictly exogenous variable, which biases the LSDV estimator in short panels. We derive the bias analytically to understand its determinants and run Monte Carlo simulations to assess its likely size in empirical work. We find the bias to be smaller than the bias of the LSDV estimator in a comparable autoregressive dynamic panel model and show the LSDV method to outperform a number of alternatives in estimating fiscal reaction functions.
AbstractList This paper evaluates the bias of the least-squares-with-dummy-variables (LSDV) method in fiscal reaction function estimations. A growing number of studies estimate fiscal policy reaction functions-that is, relationships between the primary fiscal balance and its determinants, including public debt and the output gap. A previously unexplored methodological issue in these estimations is that lagged debt is not a strictly exogenous variable, which biases the LSDV estimator in short panels. We derive the bias analytically to understand its determinants and run Monte Carlo simulations to assess its likely size in empirical work. We find the bias to be smaller than the bias of the LSDV estimator in a comparable autoregressive dynamic panel model and show the LSDV method to outperform a number of alternatives in estimating fiscal reaction functions.
Author Oya Celasun
Joong Shik Kang
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1451989008
1452723907
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Keywords Single Variables: Models with Panel Data
Single Equation Models
National Debt
Debt Management
National Deficit Surplus
LCCallNum_Ident HJ192.5.C45 2006
Language English
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Snippet This paper evaluates the bias of the least-squares-with-dummy-variables (LSDV) method in fiscal reaction function estimations. A growing number of studies...
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SourceType Publisher
SubjectTerms Budget Deficits
Domestic Debt
Dynamic Models
Econometric models
Economic Models
Fiscal policy
Fiscal Reaction Functions
Panel Data
TableOfContents Intro -- Contents -- I. INTRODUCTION -- II. BIASES OF ORDINARY-LEAST-SQUARES (OLS) AND LEAST-SQUARES-WITH-DUMMY VARIABLES ( LSDV) ESTIMATORS: ANALYTICAL SOLUTIONS -- III. MONTE CARLO EXPERIMENTS -- IV. CONCLUSION -- References
Title On the Properties of Various Estimators for Fiscal Reaction Functions
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