Working Paper: NBER ID: w22662
Authors: Eric M. Leeper; Bing Li
Abstract: Single-equation estimates of fiscal reaction functions, which relate primary surpluses to past debt-GDP ratios and control variables, are subject to potentially serious simultaneity bias that can produce misleading inferences about fiscal behavior. Biases arise from failure to model the general equilibrium relationships between government debt and surpluses, relationships that bring in the forward-looking nature of nominal debt valuation and the role of monetary policy in that valuation.
Keywords: No keywords provided
JEL Codes: C13; E62; E63; H62; H63
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| primary surpluses (H62) | past debt-to-GDP ratios (H68) |
| lagged debt variable (bt-1) (H68) | estimated coefficients in surplus-debt regression (C51) |
| fiscal policy disturbances (st) (E63) | bias in estimates of fiscal reaction function (E62) |
| monetary policy is passive (E63) | bias in estimates of fiscal reaction function (E62) |
| weak response of fiscal policy (E62) | misrepresentation of relationship between fiscal policy actions and debt (E62) |
| specific monetary-fiscal regime (E63) | conditional regression results (C29) |