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Implementing Causality Tests with Panel Data, with an Example from LocalPublic Finance

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  • Douglas Holtz-Eakin
  • Whitney K. Newey
  • Harvey S. Rosen

Abstract

This paper considers estimation and testing of vector autoregression coefficients in panel data, and applies the techniques to analyze the dynamic properties of revenues, expenditures, and grants in a sample of United States municipalities. The model allows for nonstationary individual effects, and is estimated by applying instrumental variables to the quasi-differenced autoregressive equations Q Particular attention is paid to specifying lag lengths and forming convenient test statistics. The empirical results suggest that intertemporal linkages are important to the understanding of state and local behavior. Such linkages are ignored in conventional cross sectional regressions. Also, we present evidence that past grant revenues help to predict current expenditures, but that past expenditures do not help to predict current revenues.

Suggested Citation

  • Douglas Holtz-Eakin & Whitney K. Newey & Harvey S. Rosen, 1989. "Implementing Causality Tests with Panel Data, with an Example from LocalPublic Finance," NBER Technical Working Papers 0048, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberte:0048
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    References listed on IDEAS

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    Cited by:

    1. Daniel S. Hamermesh, 1987. "Why Do Fixed-Effects Models Perform So Poorly? The Case of Academic Salaries," NBER Working Papers 2135, National Bureau of Economic Research, Inc.
    2. Yalta, A. Yasemin & Yalta, A. Talha, 2012. "Does financial liberalization decrease capital flight? A panel causality analysis," International Review of Economics & Finance, Elsevier, vol. 22(1), pages 92-100.
    3. Yen-Ling Chang & Daniel A. Talley, 2017. "Bank risk in a decade of low interest rates," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 41(3), pages 505-528, July.
    4. Ogundari, Kolawole, 2021. "Causal Relationship between Economic Growth and Agricultural productivity in Sub Saharan Africa: A Panel Cointegration Approach," MPRA Paper 110199, University Library of Munich, Germany.
    5. Douglas Holtz-Eakin, 1986. "Testing for Individual Effects in Dynamic Models Using Panel Data," NBER Technical Working Papers 0057, National Bureau of Economic Research, Inc.
    6. Lach, Saul & Schankerman, Mark, 1987. "The Interaction Between Capital Investment and R&D in Science-Based Firms," Working Papers 87-36, C.V. Starr Center for Applied Economics, New York University.
    7. Panos Sousounis, 2009. "Estimating the effect of state dependence in work-related training participation among British employees," Working Papers 0920, Department of Accounting, Economics and Finance, Bristol Business School, University of the West of England, Bristol.
    8. Panos, Sousounis, 2008. "State dependence in work-related training participation among British employees: A comparison of different random effects probit estimators," MPRA Paper 14261, University Library of Munich, Germany, revised Mar 2009.
    9. Erkan Erdil & I. Hakan Yetkiner, 2004. "A Panel Data Approach for Income-Health Causality," Working Papers FNU-47, Research unit Sustainability and Global Change, Hamburg University, revised Apr 2004.

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