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A golden rule of public finance or a fixed deficit regime?:Growth and welfare effects of budget rules

Authors
Journal
Economic Modelling
0264-9993
Publisher
Elsevier
Publication Date
Volume
27
Issue
2
Identifiers
DOI: 10.1016/j.econmod.2009.11.005
Keywords
  • Budget Rules
  • Golden Rule Of Public Finance
  • Fiscal Policy
  • Endogenous Growth
  • Welfare

Abstract

Abstract In this paper, we compare growth and welfare effects of various budget rules within an endogenous growth model with productive public capital, utility enhancing public consumption and public debt. We find that introducing a fixed deficit regime does not affect the long run growth rate compared to a balanced budget while establishing a golden rule results in higher growth. Simulations of welfare effects indicate that a golden rule leads to highest welfare followed by a balanced budget and a fixed deficit regime. A maximum fraction of deficit financed public investment is derived. Varying the intertemporal elasticity of substitution shows that economies populated by households who have a strong tendency to smooth consumption should adhere to a balanced budget from a welfare point of view.

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