Showing papers on "Golden Rule (fiscal policy) published in 2004"

Public Investment: Another (Different) Look

Abstract: Using a structural Vector Autoregression approach, this paper compares the macroeconomic effects of the three main government spending tools: government investment, consumption, and transfers to households, both in terms of the size and the speed of their effects on GDP and its components. Contrary to a common opinion, there is no evidence that government investment shocks are more effective than government consumption shocks in boosting GDP: this is true both in the short and, perhaps more surprisingly, in the long run. In fact, government investment appears to crowd out private investment, especially in dwelling and in machinery and equipment. There is no evidence that government investment "pays for itself" in the long run, as proponents of the "Golden Rule" implicitly or explicitly argue. The positive effects of government consumption itself are rather limited, and defense purchases have even smaller (or negative) effects on GDP and private investment. There is also no evidence that government transfers are more effective than government consumption in stimulating demand.

The Evolution of the Golden Rule

Abstract: Humans and other primates have a keen sense of fairness and a tendency to cooperate, even when it does them no discernible good.

Welfare implications of national debt in a OLG model with endogenous fertility

Abstract: In the present work we show that, when one allows for endogenous fertility in Diamond's (1965) OLG model, public debt plays still a clear-cut role on dynamic inefficiency (DI): for correcting DI, national debt must be increased. DI is more likely to occur when the economy capital income share and the preference for children are sufficiently low and the degree of patience is sufficiently high. However, differently from Diamond's case, DI turns out to be a necessary but not a succient condition for welfare improvements to obtain via debt increases, since, in presence of endogenous fertility, the optimal level of debt is typically lower than the one associated to the traditional Golden Rule. Hence, not taking fertility choices into account would lead policymakers to overshoot the target, i.e. to issue too high a level of national debt. Finally, a sensitivity analysis shows that the optimal level of debt is higher the lower the capital share, the higher individuals' degree of patience, the bigger the child rearing cost and the lower the preference for children. On policy grounds we argue that for debt tightening policies to be optimal in the long run, it is necessary that the cost of rearing children does not increase (or, if anything, reduces).

Teaching the Golden Rule

Abstract: The Golden Rule is endorsed in oneform or another by most cultures and majorreligions and is still espoused byphilosophers, business ethicists, and popularbusiness authors. Because it also resonateswith undergraduate business majors, it can bean effective teaching tool. This paperdescribes a way of teaching the Golden Rulethrough a series of business-oriented examplesintended to bring out its strengths andweaknesses. The method described alsointroduces students to some basic moralreasoning skills and acquaints them with a widerange of moral issues that arise in business. Kant's Formula of Humanity is discussed in thefinal section as a principle that overcomes atleast some of the Golden Rule's defects.

Public investment: another (different) look

Abstract: Using a structural Vector Autoregression approach, this paper compares the macroeconomic effects of the three main government spending tools: government investment, consumption, and transfers to households, both in terms of the size and the speed of their effects on GDP and its components. Contrary to a common opinion, there is no evidence that government investment shocks are more effective than government consumption shocks in boosting GDP: this is true both in the short and, perhaps more surprisingly, in the long run. In fact, government investment appears to crowd out private investment, especially in dwelling and in machinery and equipment. There is no evidence that government investment “pays for itself” in the long run, as proponents of the “Golden Rule” implicitly or explicitly argue. The positive effects of government consumption itself are rather limited, and defense purchases have even smaller (or negative) effects on GDP and private investment. There is also no evidence that government transfers are more effective than government consumption in stimulating demand.

Fiscal Rules for Subnational Governments: Lessons from the EMU

Abstract: The fiscal rules adopted in the context of Europe’s Economic and Monetary Union (EMU) have extensive implications for European Union (EU) governments at all levels. This chapter focuses on the impact of EMU fiscal rules on the relationship between national and subnational governments, with particular reference to five member countries.2

Patching up the pact: some suggestions for enhancing fiscal sustainability and macroeconomic stability in an enlarged European Union

Abstract: The paper considers the implications for the EU accession candidates of Central and Eastern Europe of the fiscal-financial constraints imposed by the Stability and Growth Pact and the Maastricht Treaty. Our findings apply also to those current EU members whose initial conditions (e.g., infrastructure and progress in state pension reform) or other structural characteristics (e.g., demographic structure, growth potential, Balassa-Samuelson equilibrium real exchange rate appreciation) differ significantly from the EU average. We find the existing criteria to be seriously flawed and propose an alternative rule, the Permanent Balance Rule, based on a strong form of tax smoothing.

The Role of Public Debt in the UK Fiscal Rules

Abstract: Woods analyses the role of public debt within the UK fiscal rules. The analysis is framed in the context of both the theoretical literature on fiscal sustainability and of the UK debt history. The UK government has two rules: the golden rule and the sustainable investment rule. The paper focuses on the latter, which requires public sector net debt as a proportion of GDP to be held at a stable and prudent level over the economic cycle. More specifically, net debt should be maintained below 40 per cent of GDP over the economic cycle. First, the paper discusses the theoretical basis underlying the role of the debt within the UK fiscal framework. Then it assesses the degree of sustainability of UK public finances. The paper concludes that, on the basis of current policies and under a range of reasonable assumptions, the UK public finances seem sustainable in the long term.

Debt, Growth and Budgetary Regimes

Abstract: Within the Barro (1990) model of productive public services, but with the inclusion of public debt, we derive and characterize on the balanced growth path, a set of welfare-maximizing fiscal rules under two budgetary regimes – one with only the standard dynamic government budget constraint, and the other involving the golden rule of public finance. We demonstrate analytically that the optimal fiscal policy differs in the two budgetary regimes considered. We also analyse two cases within the second regime: one, where the ratio of current spending to tax revenues is parametrically given, and another, where this ratio is optimally chosen by the government.

Debt, Growth and Budgetary Regimes

Abstract: Within the Barro (1990) model of productive public services, but with the inclusion of public debt, we derive and characterize on the balanced growth path, a set of welfare maximizing fiscal rules under two budgetary regimes - one with only the standard dynamic government budget constraint, and the other involving the golden rule of public finance. We demonstrate analytically that the optimal fiscal policy differs in the two budgetary regimes considered. We also analyse two cases within the second regime: one, where the ratio of current spending to tax revenues is parametrically given, and another, where this ratio is optimally chosen by the government.

Social Security and Trust Fund Management

Abstract: In this paper we investigate why and to what extent the government should have a social security trust fund, and how it should manage the fund in the face of demographic shocks, based on a simple overlapping-generations model. We show that the government should have a trust fund in some form, given an aging population, to achieve the (modified) golden rule or to offset the negative income effect of a PAYGO system. Besides, in a closed economy where factor-prices effects dominate, it is not advisable to use the trust fund as a buffer for demographic shocks, because it could lead to a widening of intergenerational inequality. We also the discuss policy implications of our analysis on the social security reform debate in Japan, including the fixed tax method and the use of the trust fund in the face of a rapidly aging population.

What Makes a Leader

Abstract: Leadership cannot be faked, say Rob Goffee and Gareth Jones. All the self-help books in the world won't make you a leader - but there are four characteristics you must have. Each leader is unique and it is that difference that others follow. There is no golden rule for top managers but the best have some traits in common. There is one question guaranteed to bring a stunned silence to the boardroom or business school lecture theatre: Why should anyone be led by you?

What Makes a Leader

Abstract: Leadership cannot be faked, say Rob Goffee and Gareth Jones. All the self-help books in the world won't make you a leader - but there are four characteristics you must have. Each leader is unique and it is that difference that others follow. There is no golden rule for top managers but the best have some traits in common. There is one question guaranteed to bring a stunned silence to the boardroom or business school lecture theatre: Why should anyone be led by you?

Fiscal policy in the accession countries

Abstract: This paper is part of a larger research concerning the EU New Members’ tax systems, carried on at the University of Pavia, under the coordination of L. Bernardi, M. Chandler and L. Gandullia, and the supervision of V. Tanzi. The analysis of the future fiscal policy which will prevail in an enlarged Europe must encompass a couple of aspects concerning the macroeconomic and public finance characteristics of accession countries, i.e. their first best strategy in managing the transition towards the Union and the weak points emerged in the design of fiscal rules governing the EU 12. This paper considers all these elements in the design of the optimal fiscal rule governing both the transition and the steady state phases of an enlarged Europe. We state that, given the small and open nature of accession countries’ economies, an optimal policy should avoid at first glance a prolonged transition time, before the adoption of euro. Therefore a well-suited fiscal rule shouldn’t be concerned about short-run shocks. In particular, we propose that a no-transition hypothesis to join the euro should be accompanied by the adoption of the actual Stability and Growth Pact (SGP). Hence, the question arises whether the SGP is a good fiscal rule for the EU12 countries or it needs a substantial revisiting. A review of main criticisms and proposals suggests that to improve the present situation an internal revision of the SGP should be sufficient, by adopting a multiple targeting criteria in the spirit of Maastricht accession rules. Specifically, the rule of 3 per cent should be maintained but weighted by the level of debt to GDP ratio and, where available, by the cyclically adjusted primary balance. Moreover the new SGP should be addressed towards a golden rule conditional on debt to GDP ratio in order to promote public investments without putting into risk the fiscal sustainability in the long run. The rationale underlying this setting would resemble that one used in the conduction of monetary policy by ECB, based on a single target but with two pillars. The “enlarged” European Commission could adopt a similar strategy by declaring the “targets” in terms of deficit and the debt to GDP ratio, but not revealing ex ante in which way it evaluates the sustainability of national public finances. Of course, this proposal would involve some procedural adjustment in order to make more accountable and more powerful in its role the Commission, but this would seem to be an unavoidable price to grant stability, flexibility and co-ordination to fiscal policy in an enlarged Europe.

Updating the UK's code for fiscal stability

Abstract: The 1998 Code for Fiscal Stability sets out the framework within which UK fiscal policy is now set. While having such a code does not make it easier for a Government to meet its fiscal objectives, it may improve the economic credibility of the policy process. To date the Code has generally worked well, and in any case many of the Treasury’s practices exceed the minimum requirements of the Code. However, improvements could be made in the light of recent experiences. In particular it would be preferable for less emphasis to be placed on the precise forecasts for fiscal aggregates and greater emphasis to be placed on the magnitude of the risks to those forecasts. Using the projections contained in the March 2004 Budget, and information on the size of errors made in the past, we estimate that there is now a 60% chance that the Chancellor’s “golden rule” will be met without further tax increases or spending cuts. This compares to 74% for the forecast made by the Treasury 12 months earlier. As well as clarifying how cautious forecasts are, the uncertainty surrounding projections for fiscal aggregates also has implications for the way in which progress towards any fiscal rules should be interpreted.

On accepting African power and adapting in the media world

Abstract: One of the former Fleet Streets' greatest editors, Arthur Christiansen of the Express, coined a phrase, which I have made my golden rule: Show me a contented editor and I will show you a bad newspaper. That rule applies to all fields of business activity.

Security, immigration and development assistance: an integrated approach

Abstract: The European Union’s security and immigration policy requires a set of actions coordinated between the Union and individual Member States, plus a consistent policy of development cooperation within the frame work of European Neightbourhood Policy (ENP). This article takes a look at the European approach in these policy areas. After considering the economic and social causes of international migration, it dwells on the prospective “migratory pressure” on Europe, which is expected to be strong, especially from the southern shores of the Mediterranean. The authors stress the essential role of European Neightbourhood Policy, which must promote development and democracy in the countries bordering on the Union. It is necessary to create an area of stability and security within which to achieve negotiated regulation of migratory flows. It is argued that the financial resources for ENP are inadequate and that a decisive role will be played by bilateral aid to the bordering countries from EU member States. Nevertheless, the author observe that these resources are subject to the budgetary constraints of the Stability and Growth Pact and accordingly recommend that the development assistance should also be treated as investment in stability and security, the benefits of which will be reflected in diminished future costs for individual European countries. The authors therefore call for the application of the “golden rule” to this expenditure, treating it on a par with investment and R&D spending for purpose of calculating government deficits.

Reform of the stability and growth pact

Abstract: The euro area, after a poor growth performance in 2002, has stepped aside in 2003 the word economic recovery. Concurrently, as was easily predictable since its inception, all the flaws of the SGP emerged once the European economy started to loose speed. Compared to the strongly proactive fiscal policy in the US and the UK, Europe remained substantially inertial, with an almost neutral policy stance. As a result, and despite a growth rate of 0.4 % in 2003 -- as compared with 3.1 % for the US and 2.3 % for the UK -- the area had in 2003 a much lower public deficit than these two countries! The main flaws of the SGP become then obvious: it lacks flexibility; it is asymmetric; it disregards the intertemporal content of public spending; it neglects the long term sustainability of public finance. The arguments -- both theoretical and empirical -- in favour of the SGP appear so weak that the question arises if it is not following a hidden agenda. Reform proposals have been advocated since long and they are not mutually exclusive: -- to focus on structural deficits -- to apply the golden rule of public finance, the task of defining what belongs to investment spending being left to the European council and to the European parliament. -- to take into account long term sustainability, not so much as a mean of punishing high debt countries, but to reward low debt ones. But even if all these reforms are adopted, the new SGP would at most be a second best solution. The real missing element is an area-wide fiscal policy actor capable of interacting with the ECB, so as to assure an efficient policy-mix. Even if this solution is not conceivable in the present political setting, it may be considered as a benchmark to foster both more coordination inside the European council and more reactivity (i.e. more growth responsibility) from its part.

Social Security and Trust Fund Management

Abstract: In this paper we investigate why and to what extent the government should have a social security trust fund, and how it should manage the fund in the face of demographic shocks, based on a simple overlapping-generations model. We show that, given an aging population, a trust fund in some form could achieve the (modified) golden rule or to offset the negative income effect of a PAYGO system. Besides, in a closed economy where factor-prices effects dominate, using the trust fund as a buffer for demographic shocks could lead to a widening of intergenerational inequality. We also the discuss policy implications of our analysis on the social security reform debate in Japan, including the fixed tax method and the use of the trust fund in the face of a rapidly aging population.

Alternative Dynamics and Stability Results in a Standard OLG Model: An Interpretation

Abstract: In this paper we make a critique of the standard stability re- sults already established in a basic two period OLG model. Under an al- ternative interpretation (competitive financial markets), we are able to select the test equilibrium in the long run, in such a way that the economy can reach the Golden Rule Steady State, even when at this interest rate, all young agents are creditors. We show that even if the economy starts with only young people —referred to as the Garden of Eden Economy—, it also reaches the Golden Rule Steady State. Additionally, as a by-prod- uct of this study, we obtain a complete characterization of the possible