On the Properties of Various Estimators for Fiscal Reaction Functions
29 Pages Posted: 23 Aug 2006
Date Written: July 2006
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.
Keywords: Fiscal reaction functions, panel data, dynamic models
JEL Classification: C23, H62, H63
Suggested Citation: Suggested Citation
Do you have negative results from your research you’d like to share?
Recommended Papers
-
Fiscal Policy and Monetary Integration in Europe
By Jordi Galí and Roberto Perotti
-
Fiscal Policy and Monetary Integration in Europe
By Jordi Galí and Roberto Perotti
-
Revisiting the Stability and Growth Pact: Grand Design or Internal Adjustment?
By Marco Buti, Sylvester C. W. Eijffinger, ...
-
By Willem H. Buiter and Clemens Grafe
-
Fiscal Rules: Useful Policy Framework or Unnecessary Ornament?
-
Improving the Sgp Through a Proper Accounting of Public Investment
-
Consumption Smoothing Through Fiscal Policy in OECD and EU Countries
By Adriana Arreaza, Bent E. Sørensen, ...