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This paper studies asymptotically the bias of the fixed effect (FE) estimator induced by cross-section heterogeneity in the slope parameters of stationary vector autoregressions (VARs). The paper also compares the FE, the mean group estimator (MG), and a simple instrumental variable alternative (IV) in Monte Carlo simulations. The main results are: (i) asymptotically, the heterogeneity bias of the FE may be more or less severe in VAR specifications than in standard dynamic panel data specifications; (ii) in Monte Carlo simulations, slope heterogeneity must be relatively high to be a source of concern for pooled estimators; (iii) when this happens, the panel must be longer than a typical macro dataset for the MG to be a viable solution.

Econometrics --- Multiple or Simultaneous Equation Models: Models with Panel Data --- Estimation --- Simulation Methods --- Time-Series Models --- Dynamic Quantile Regressions --- Dynamic Treatment Effect Models --- Diffusion Processes --- Multiple or Simultaneous Equation Models --- Multiple Variables: General --- Econometrics & economic statistics --- Vector autoregression --- Vector error correction models --- Econometric models

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Staff Discussion Notes showcase the latest policy-related analysis and research being developed by individual IMF staff and are published to elicit comment and to further debate. These papers are generally brief and written in nontechnical language, and so are aimed at a broad audience interested in economic policy issues. This Web-only series replaced Staff Position Notes in January 2011.

Public Finance --- Multiple or Simultaneous Equation Models: Models with Panel Data --- Fiscal Policy --- National Government Expenditures and Health --- National Government Expenditures and Education --- National Government Expenditures and Related Policies: General --- Health: General --- Public finance & taxation --- Health economics --- Education spending --- Health care spending --- Expenditure --- Total expenditures --- Health --- Expenditures, Public

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This paper investigates the heterogenous effects of budget balance rules on fiscal policy in a large sample of countries. To derive country-specific treatment effects of fiscal rules and conduct inference, we use a Synthetic Difference-in-Differences Method. Our results indicate that countries with a budget balance rule improve their fiscal balance on average by around 3 percent after its introduction. However, our results also illustrate the importance of going beyond the average treatment effect, as it masks significant heterogeneity in the country-specific impact of the rule. We find that countries that would have had large deficits in the absence of the fiscal rule exhibit positive treatment effects, thus reducing their budget deficits. On the other hand, countries with budget surpluses respond to fiscal rules by reducing their budget surplus and moving closer to the numerical target of the rule. Our results also suggest that rules’ design matters: a small overall number of fiscal rules, and the presence of a monitoring process outside the government, especially at the supra-national level, improve significantly the effectiveness of the rules.

Business and Economics --- Budgeting --- Macroeconomics --- Public Finance --- Policy Objectives --- Policy Designs and Consistency --- Policy Coordination --- Fiscal Policy --- National Deficit Surplus --- Multiple or Simultaneous Equation Models: Models with Panel Data --- National Budget --- Budget Systems --- Debt --- Debt Management --- Sovereign Debt --- Budgeting & financial management --- Public finance & taxation --- Fiscal rules --- Budget planning and preparation --- Government debt management --- Fiscal stance --- Public debt --- Fiscal policy --- Budget --- Debts, Public

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The paper analyzes the forces driving inflation in the new EU10 member countries. A significant part of headline inflation in these countries is due to common factors, such as price level convergence and EU integration. However, idiosyncratic factors have also played a role in the inflation process. These factors are related to the country-specific financial conditions, pass-through from foreign prices, and demand-supply situation in each country, although administered price adjustments and increases of indirect taxes associated with EU accession are also likely to have played a role.

Finance --- Business & Economics --- Money --- Inflation (Finance) --- Fiscal policy --- Tax policy --- Taxation --- Government policy --- Economic policy --- Finance, Public --- Natural rate of unemployment --- Banks and Banking --- Foreign Exchange --- Inflation --- Macroeconomics --- Estimation --- Multiple or Simultaneous Equation Models: Models with Panel Data --- Price Level --- Deflation --- Economic Integration --- Energy: Demand and Supply --- Prices --- Interest Rates: Determination, Term Structure, and Effects --- Currency --- Foreign exchange --- Nominal effective exchange rate --- Energy prices --- Exchange rate arrangements --- Real interest rates --- Financial services --- Interest rates --- Czech Republic

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The paper suggests an econometric methodology for testing the effectiveness of reforms implemented in one major step, i.e., discrete reforms. The methodology is based on the exogeneity properties of variables in an econometric model. The paper specifies the preconditions for setting up an appropriate model; suggests an economic interpretation of the tests for weak, strong, and superexogeneity; and illustrates this methodology by applying it to two cases of instantaneous reforms. The exogeneity properties of variables in a correctly specified econometric model may help uncover information on the preparation, implementation, and the outcome of such reforms, which could be useful for future policy advice.

Econometrics --- Foreign Exchange --- Time-Series Models --- Dynamic Quantile Regressions --- Dynamic Treatment Effect Models --- Diffusion Processes --- State Space Models --- Multiple or Simultaneous Equation Models: Models with Panel Data --- General Aggregative Models: Forecasting and Simulation --- Macroeconomics: Production --- Economic Growth of Open Economies --- Macroeconomic Aspects of International Trade and Finance: Forecasting and Simulation --- Econometric Modeling: General --- Econometric and Statistical Methods: General --- Currency --- Foreign exchange --- Econometrics & economic statistics --- Econometric models --- Exchange rate unification --- Exchange rates --- Econometric analysis --- Exchange rate arrangements --- United Kingdom