Showing papers on "Golden Rule (fiscal policy) published in 2001"

The stability and growth pact : the architecture of fiscal policy in EMU

Abstract: List of Tables List of Figures Acknowledgements Notes on the Contributors Introduction A.Brunila, M.Buti & D.Franco PART 1: DOES THE EMU NEED FISCAL RULES Does EMU Need a Stability Pact? R.Beetsma The Stability and Growth Pact: a delicate balance or an albatross? M.B.Canzoneri & B.T.Diba PART 2: WHERE DOES THE PACT COME FROM? Genesis of a Pact J.Stark The Stability and Growth Pact: how did we get there? D.Costello PART 3: HOW DOES THE PACT WORK? Main aspects of the working of the Stability and Growth Pact A.J.Cabral Fiscal surveillance under the pact: the stability and Convergence Programmes J.Fischer & G.Giudice PART 4: "CLOSE TO BALANCE OR IN SURPLUS": THE MEDIUM TERM BUDGETARY TARGETS Setting medium-term fiscal targets in EMU M.J.Artis & M.Buti Estimating prudent budgetary margins for EU countries: a simulated SVAR model approach T.Dalsgaard & A.de Serres The Stability and Growth Pact, will it ever be reached? R.Barrell & K.Dury PART 5: FISCAL POLICY CO-ORDINATION UNDER THE PACT Fiscal policy, automatic stabilisers and policy co-ordination in EMU M.Viren Should fiscal policy co-ordination go beyond the SGP? S.Korkman PART 6: PUBLIC DEBT UNDER THE STABILITY AND GROWTH PACT Optimal debt under a deficit constraint M.Rostagno, P.Hiebert & J.Perez-Garcia How should the debt be managed? Supporting the Stability Pact A.Missale PART 7: WERE THERE POSSIBLE ALTERNATIVES? Public investment, the stability Pact and the 'Golden Rule' F.Balassone & D.Franco Achieving fiscal discipline through tradable deficit permits A.Casella Glossary References Index

Notes on 'a code for fiscal stability'

Abstract: This note comments on two central issues for fiscal policy design in the UK, highlighted in the recent "Code for Fiscal Stability" proposed by the new Labour government. The first concerns the merits of the so-called "golden rule of public sector investment"--the proposition that, over the cycle, government borrowing should not exceed government (net) capital formation. The second concerns the case for attempting to construct a more comprehensive balance sheet of public sector assets and liabilities, including tangible public sector assets and certain contingent claims. The two main conclusions are that the golden rule is without merit but that, subject to some important caveats, the construction of a more comprehensive government balance sheet is a worthwhile enterprise. Copyright 2001 by Oxford University Press.

Fiscal Federalism and the Stability and Growth Pact: A Difficult Union

Abstract: Balassone and Franco note that while the budget rules that frame EMU apply to national States, several EMU member nations are already organised on a federal basis and others, pressed by political and economic needs, have started to enact reforms aimed at increasing the degree of decentralisation. They highlight several critical areas in the interaction of fiscal decentralisation and the Stability and Growth Pact. Balassone and Franco point to the reduced flexibility of the European approach compared with solutions adopted in federally structured countries and to the asymmetry between the responsibilities laid on national and local governments by European rules (compliance with the rules depends on the conduct of all levels of government, but de facto it is the central government that is answerable to the EU and that must pay the price for non-compliance). This calls for strict controls over local governments to prevent free-riding. The authors examine alternative solutions to deal with these problems, such as the mechanical extension of the Stability and Growth Pact, the introduction of a golden rule for decentralised governments, also in the form of a market for deficit permits, and the use of reserve funds. Finally, Balassone and Franco analyse how the issue has been addressed in Italy through the introduction of the Domestic Stability Pact and stress the need for further significant refinements of these domestic rules.

The SGP and the ‘Golden Rule’

Abstract: The slowdown in growth in 1998 and its possible implications for the level of unemployment raised worries and doubts concerning the fiscal rules set in the Treaty of Maastricht and in the Stability and Growth Pact. It has been argued that these rules may represent an excessively binding constraint for appropriate counter-cyclical action and that the attempt to reach rapidly a budget position ‘close to balance or in surplus’ may worsen the slowdown. The risk that the rules may permanently reduce the public sector’s contribution to capital accumulation has also been pointed out.

The Discussion on a National Stability Pact in Germany

Abstract: Wendorff analyses the German experience in reconciling European fiscal rules and a federal organisation. He highlights the main features of German decentralisation: the emphasis on uniformity of conditions throughout the country, the co-operation of federal and regional governments in shaping budgetary rules and the consequent implicit bail-out provision, and the important roles of shared taxes and intergovernmental transfers. He notes the unsatisfactory results of German budgetary rules, based on the golden rule approach, in terms of deficit control. The effectiveness of the rules was weakened by the broad definition of investment and the failure to consider depreciation. Wendorff recalls that the approval of the Stability and Growth Pact gave rise to an intense debate in Germany on the benefits of a so-called “national stability pact”. The discussion focused on the legal status of the pact, the distribution of deficit between federal and regional/local governments, its distribution within regional/local governments, and the structure and distribution of sanctions. In the end, it proved difficult to reach a consensus on major issues, with the result that no national stability pact has so far been adopted. Wendorff suggests the introduction of a rule prescribing federal and regional governments to balance their budgets over the cycle and notes that this rule should be introduced in the context of a reform disentangling the fiscal responsibilities of the different levels of governments and increasing the revenue responsibility of each public authority.

Is There a Golden Rule for the Stochastic Solow Growth Model

Abstract: This paper analyzes the dependence of average consumption on the saving rate in a one-sector neoclassical Solow growth model with production shocks and stochastic rates of population growth and depreci-ation where arbitrary ergodic processes are considered. We show that the long-run behavior of the stochastic capital intensity, and hence average consumption along any sample-path, is uniquely determined by a random fixed point which depends continuously on the saving rate. This result enables us to prove the existence of a golden rule saving rate which maximizes average consumption per capita. We also show that the golden rule path is dynamically efficient. The results are illustrated numerically for Cobb-Douglas and CES production function.

National and State Fiscal Rules in Australia: An Outline and Critical Analysis

Abstract: Robinson notes that since the late 1980s deficits and public debt have been the major preoccupation of Australian fiscal policy. There was a widespread public perception that a number of States, and subsequently the national government, were experiencing debt crises. As a reaction, in the 1990s, most federal governments adopted explicit fiscal rules requiring balanced cash budgets. Governments aimed at reducing debt and usually targeted structural cash surpluses. At a later stage, some governments introduced accrual accounting which distinguishes between consumption and investment. Robinson argues that the golden rule can best be expressed as a rule requiring the accrual operating balance (i.e. the gap between revenues and consumption including capital amortisation) to average zero over the business cycle. He notes that this result may represent the best practicable approximation of the intergenerational equity principle: each time period should pay for itself. The net worth of the public sector would remain constant. While some States adopted the golden rule, the federal government went for a zero “fiscal balance” (i.e., the operating balance minus net non-financial investment) over the cycle. Net financial worth would remain constant in nominal terms. This approach is tighter than that required for fiscal sustainability.

A Golden Rule: Remember the Gift

Abstract: A Golden Rule: Remember the Gift IWOULD LIKE TO OFFER A SIMPLE FORMULA THAT PHYSIcians can readily apply to act humanistically when faced with moral dilemmas in medical practice that they do not know how to handle. Since this formula really is quite simple, I am hoping those who use it will be able to pass it on to their students, residents, and colleagues and thereby enhance humanism in medicine, even under the modern pressures of cost containment, managed care, and other forces. The 20-year tale of my search for this simple moral rule or formula is itself instructive and dates back to the wonderful opportunity I had to study moral philosophy for a couple of years between college and medical school. With that academic background, I arrived at medical school knowing a lot about what all the great thinkers thought about questions of right and wrong, and I was conversant in a host of theoretical frameworks and models for moral decision making. But I obviously did not know the first thing about the practical side: how to put all of this theory into practice. So in my first year of medical school, I went around to some of the most distinguished professors of medicine I could find, asking them what framework or rule they applied when faced with some moral dilemma in medicine. Most of them replied to me in the same way, saying something like, “What the heck are you talking about?” I would respond with my sense that, when they are faced with, say, a patient on a ventilator who is unable to do much but suffer and they, the physicians, have to work with the family to make a decision about whether to pull the proverbialplug, that theymusthavesomesortof frameworkorguideline that informs their thinking about the moral aspects of the decision. What I thought they would say is that they apply the most time-honored formula in ethics, the Golden Rule. This just goes to show how naive I was. Not one of those wise, gray-haired physicians said that they ask themselves what they would want if they were on the ventilator. And indeed, why should they? That basic formulation of the Golden Rule just does not work in the practice of medicine. First, it is not realistic for us, as physicians, to have to imagine our own final, painful days every time we have to participate in such a clinical and moral decision. Second—and even more important— the fact is that what I want for myself when I am the patient on the ventilator is completely irrelevant to what is right for this patient who might have different religious beliefs or a different cultural or family background. Surprisingly (to some), asking “If this were me, what would I want?” does not necessarily contribute to a morally informed decision. What many of those professors did say was very interesting. Many of them said something like “Well, I guess I think to myself, ‘If this patient were my mother, what would I want for her?’” Of course, you do not have to be a psychiatrist to see the methodologic flaw in the Golden Rule corollary that says, “Do unto others as you would have them do unto your mother!” And so that response did not get me much closer to the formula or rule for which I was hunting (although it did introduce me to what I later learned some people call “countertransference distortions” in ethical problem solving). But I kept my ears open over the years, trying to find whether there was some kernel or essence in the Golden Rule that could work (all the while ignoring the fact that, during the early rise of HMOs, many people were beginning to think that in medicine, the Golden Rule means “Whoever has the gold makes the rules!”). What has been interesting to follow is how people have shifted to different versions of the formula over time. For some years it has been said, “If this patient were my child, what would I want done for him or her?” This version obviously tries to capture an incredible degree of caring. But it also engages one’s maternal or paternal emotional instincts, so this “my own child” version of the thought experiment has the potential of not providing enough objective distance, as when parents might be tempted to continue with heroic measures (hoping for some kind of miracle for their own child), beyond what they might think reasonable for any other patient. So the alternative was proposed: “What would I do if this patient were, say, a favorite niece or nephew?” as yet another attempt to formulate a useful, simple rule. About 12 years ago, this line of thought brought my attention more fully to the core moral issue of caring for the patient, perhaps best captured by Francis Weld Peabody’s immortal words: “the secret of the care of the patient is in caring for the patient.” It finally occurred to me that perhaps the rule could be modified to what might be called the Rule of Caring. Rather than ask ourselves “If this patient were me” or “If this patient were my mother,” we could formulate the rule as follows: Start with the more realistic supposition: “If this patient were this patient” (a clear advantage already, since it is the patient), but add the core value of medicine and ask, “If this patient were this patient, but I cared about this patient as much as I care about myself, then what would I do?” I have found that the Rule of Caring has broad application in the practice of medicine. If this patient were this patient, but I cared about this patient as much as I care about my-

Economic Growth, a Golden Rule of Thumb, and Learning by Doing

Abstract: A simple rule of thumb which has been successfully used in the basic neoclassical growth model as an alternative to the unstable dynamic optimization solution is shown to be more generally applicable in a non-scale growth model with learning by doing. The model is formulated in accordance with empirical regularities about learning by doing and shown to generate the stylized facts about economic growth reasonably well. The external effects of learning by doing can be internalized by the steady state tax cum subsidy policy implied by a decentralized dynamic optimization approach.

Economic Growth, the Mathematical Pendulum, and a Golden Rule of Thumb

Abstract: It is argued that due to their general instability dynamic optimization models cannot be used as positive theories of economic growth. The argument is substantiated by (numerical) examples. A simple rule of thumb is provided as an alternative to the RKC model. This rule is shown to perform well from a normativeand to be reasonable from a positive point of view. The model is consistent with empirically estimated rates of convergence if a broad concept of capital is used.

An Assessment of Fiscal Rules in the United Kingdom

Abstract: The paper assesses the United Kingdom's golden rule and debt rule against "ideal characteristics" of fiscal rules. It concludes that they are clearly defined; transparent in institutional arrangements and measurement; adequate to ensure sustainability; and strike a good balance between flexibility and enforceability. The rules could be strengthened by clarifying the benchmark embodied in the debt rule and the modalities of the "value for money" criterion for investment. Overall, the fiscal framework establishes the necessary preconditions for a credible fiscal policy, but the credibility of the rules could be undermined by the large gap between them and actual medium-term fiscal plans.

Optimal Growth under Endogeneous Depreciation, Capital Utilization and Maintenance Costs

Abstract: This paper analyzes the equilibrium dynamics of an optimal growth model that incorporates endogenous depreciation, variable capital utilization, and expenditures on the maintenance of physical capital. Maintenance acts as a substitute for investment, since it reduces the depreciation of capital. Investment is subject to adjustment costs, and capital is not fully utilized, the degree of capital utilization affecting the activity of maintaining. We establish a set of sufficient conditions for the existence and uniqueness of a steady state equilibrium. Also, we define a “delta golden rule” consistent with the proposed economic environment and we analyze the dynamic efficiency of this economy. Finally, the steady state is found locally saddle-path stable. These results provide a framework for the analysis of comparative dynamics in general equilibrium with these features.

Capital Accumulation and the Modified Golden Rule with Endogenous Labor Participation Rate and Efficiency Wages

Abstract: This paper examines, in the Ramsey framework, the implications of endogenous labor participation rate and efficiency wages on capital accumulation. It is shown that with endogenous labor participation rate, the economy can be dynamically inefficient. When efficiency wages are taken into consideration, the economy is dynamically efficient. The modified golden rule as derived from the Ramsey model is bounded from below by the endogenous labor participation rate model, and above by the efficiency wage model.

On the Invariance of the Rate of Return to Convex Adjustment Costs

Abstract: The Modified Golden Rule, which relates the rate of return on capital and the growth rate of the capital stock along long-run growth paths that maximize the utility of a representative infinitely-lived consumer, is invariant to the introduction of convex capital adjustment costs Therefore, along balanced growth paths in neoclassical optimal growth models with an exogenous long-run growth rate of capital, the rate of return is invariant to the introduction of convex adjustment costs, though the capital-labor ratio is reduced along such paths In AK models, convex adjustment costs reduce the growth rate and rate of return on capital

Optimal Taxation When Consumers Have Benchmark Levels of Consumption

Abstract: I examine optimal taxes in an overlapping generations economy in which each consumer's utility depends on consumption relative to the average level of consumption in the economy (the benchmark level of consumption) as well as on the level of the consumer's own consumption. The socially optimal balanced growth path is characterized by the Modified Golden Rule and by a condition on the intergenerational allocation of consumption in each period. A competitive economy can be induced to attain the social optimum by a lump-sum pay-as-you-go social security system and a tax on capital income.

The dynamic efficiency of the Ramsey model with endogenous labour participation rate

Abstract: This paper incorporates the hypothesis of labour participation rate into the Ramsey model. It is shown that the economy can be dynamically inefficient if the average productivity of capital is greater than the sum of the rate of time preference, the population growth rate, the depreciation rate and the marginal rate of substitution between labour and consumption. The modified golden rule holds when the wage rate is equal to the marginal rate of substitution between labour and consumption. However, there is no guarantee that it will happen, since labour supply is driven by capital allocation decisions. Copyright © 2001 John Wiley & Sons, Ltd.

Economic Growth, the Mathematical Pendulum, and a Golden Rule of Thumb

Abstract: It is argued that due to their general instability dynamic optimization models cannot be used as positive theories of economic growth. The argument is substantiated by (numerical) examples. A simple rule of thumb is provided as an alternative to the RKC model. This rule is shown to perform well from a normative and to be reasonable from a positive point of view. The model is consistent with empirically estimated rates of convergence if a broad concept of capital is used.

The empirical foundation of the golden rule

Abstract: This working paper analizes with cross-sectional data if the Golden Rule condition satisfies: where the saving index is equal to capital () or to the real interest rate, equal to the gross output growth of households.