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Surplus–debt regressions

Eric Leeper () and Bing Li

Economics Letters, 2017, vol. 151, issue C, 10-15

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: Fiscal policy; Fiscal sustainability; Monetary policy (search for similar items in EconPapers)
JEL-codes: C13 E62 E63 H63 (search for similar items in EconPapers)
Date: 2017
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