On the properties of various estimators for fiscal reaction functions
By: prepared by Oya Celasun and Joong Shik Kang.
Contributors: Kang, Joong Shik.; International Monetary Fund. Research Dept.
Series: IMF working paper -- WP/06/182
Publisher: International Monetary Fund, Research Dept.
Published: 2006
Place of publication: [Washington, D.C.]
Language: eng
Number of pages: 27
Subjects: Fiscal policy -- Econometric models.; Dummy variables -- Econometric models.; Debts, Public -- Econometric models.
Description: 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.
Notes: Caption title.

"July 2006."

Includes bibliographical references (p. 26-27).

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