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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Bibliographic Details
Main Authors: Celasun, Oya, Kang, Joong Shik
Format: eBook Book
Language:English
Published: Washington International Monetary Fund 01.07.2006
Edition:1
Subjects:
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
Online Access:Get full text
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Summary: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.
ISBN:9781451989007
1451864426
1451989008
1452723907
9781452723907
9781451864427