NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Surplus-Debt Regressions

Eric M. Leeper, Bing Li

NBER Working Paper No. 22662
Issued in September 2016
NBER Program(s):EFG

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.

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Document Object Identifier (DOI): 10.3386/w22662

Published: Leeper, Eric M. & Li, Bing, 2017. "Surplus–debt regressions," Economics Letters, Elsevier, vol. 151(C), pages 10-15. citation courtesy of

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