Surplus-Debt Regressions
14 Pages Posted: 26 Sep 2016 Last revised: 4 Jun 2023
Date Written: September 2016
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.
Suggested Citation: Suggested Citation
Leeper, Eric Michael and Li, Bing, Surplus-Debt Regressions (September 2016). NBER Working Paper No. w22662, Available at SSRN: https://ssrn.com/abstract=2843375
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