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The Role of Wealth Transformations: An Application to Estimating the Effect of Tax Incentives on Saving

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  • Pence Karen M.

    () (Federal Reserve Board of Governors)

Abstract

Researchers may want to estimate the percentage change of a variable, such as household wealth or corporate profits, that takes on economically significant nonpositive values. Using the logarithmic transformation, however, requires discarding observations with nonpositive values. This paper describes a possible solution to this problem-the inverse hyperbolic sine transformation-and shows how to implement this transformation optimally in the case of median regression. As an illustration of the usefulness of this transformation, I revisit a specification sometimes used to estimate the effect of tax incentives on household saving.

Suggested Citation

  • Pence Karen M., 2006. "The Role of Wealth Transformations: An Application to Estimating the Effect of Tax Incentives on Saving," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 5(1), pages 1-26, July.
  • Handle: RePEc:bpj:bejeap:v:contributions.5:y:2006:i:1:n:20
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