## On the Properties of Various Estimators for Fiscal Reaction Functions

_IMF Working Papers, July 1, 2006_

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## Bibliographic details
- Authors: Oya Celasun, Joong S Kang
- Published: July 1, 2006
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451864427.001

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### Summary
- Evaluates the bias of the least-squares-with-dummy-variables (LSDV) method in fiscal reaction function estimations.
- Fiscal reaction functions examined: relationships between the primary fiscal balance and its determinants, including public debt and the output gap.
- Identifies a previously unexplored methodological issue: lagged debt is not a strictly exogenous variable, which biases the LSDV estimator in short panels.
- Approach: derive the bias analytically to understand its determinants and run Monte Carlo simulations to assess its likely size in empirical work.
- Main conclusion: the bias of LSDV in fiscal reaction functions is smaller than the bias of the LSDV estimator in a comparable autoregressive dynamic panel model; LSDV outperforms a number of alternatives in estimating fiscal reaction functions.

### Methods and Analytical Approach
- Analytical derivation of the bias of the LSDV estimator when lagged debt is endogenous in short panels.
- Monte Carlo simulations used to assess the likely magnitude of the bias in empirical applications.
- Comparison framework: contrast LSDV bias in fiscal reaction function specifications with LSDV bias in autoregressive dynamic panel models; evaluate LSDV performance against several alternative estimators.

### Key Findings
- Lagged debt is not a strictly exogenous variable in fiscal reaction function estimations, creating bias in LSDV estimates in short panels.
- The analytically derived bias clarifies the determinants of the LSDV bias in this context.
- Monte Carlo evidence indicates:
  - The bias of LSDV in fiscal reaction functions is smaller than the bias of LSDV in comparable autoregressive dynamic panel models.
  - LSDV outperforms a number of alternative estimators for the fiscal reaction function setting.

### Subject Areas and Keywords
- Subject: Bonds, Estimation techniques, Fiscal stance, Output gap, Public debt
- Keywords: mover accent, WP

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_Source: https://www.imf.org/en/publications/wp/issues/2016/12/31/on-the-properties-of-various-estimators-for-fiscal-reaction-functions-19362_