Showing papers on "Golden Rule (fiscal policy) published in 2005"

Public Investment, the Stability Pact and the ‘Golden Rule’

Abstract: The fiscal rules set in the Treaty of Maastricht and in the Stability and Growth Pact have sometimes been criticised as an excessively binding constraint for appropriate counter-cyclical action. The risk that the rules may permanently reduce the public sector’s contribution to capital accumulation has also been pointed out. In this framework, the adoption of a ‘golden rule’ has been suggested. Starting from the recent debate, this paper tackles two questions: (a) the implications of the Pact for public investment and (b) the pros and cons of introducing a golden rule in EMU’s fiscal framework, given the objectives of low public debts and adequate margins for a stabilising budgetary policy. The analysis suggests that the rules set in the Treaty and in the Pact may negatively influence public investment spending. However, the golden rule, although intuitively appealing, does not seem to be an appropriate solution to the problem. 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

Optimal Taxation When Consumers Have Endogenous 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 a weighted average of consumption by others (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 ModiÞed 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.

Politics and Efficiency of Separating Capital and Ordinary Government Budgets

Abstract: We analyze the democratic politics of a rule that separates capital and ordinary account budgets and allows the government to issue debt to finance capital items only. Many national governments followed this rule in the 18th and 19th centuries and most U.S. states do today. This simple 1800s financing rule sometimes provides excellent incentives for majorities to choose an efficient mix of public goods in an economy with a growing population of overlapping generations of long-lived but mortal agents. In a special limiting case with demographics that make Ricardian equivalence prevail, the 1800s rule does nothing to promote efficiency. But when the demographics imply even a moderate departure from Ricardian equivalence, imposing the rule substantially improves the efficiency of democratically chosen allocations. We calibrate some examples to U.S. demographic data. We speculate why in the twentieth century most national governments abandoned the 1800s rule while U.S. state governments have retained it.

Puzzling over sustainability: an equilibrium analysis

Abstract: In this paper we model an overlapping generations economy in which individuals are endowed with a renewable resource. This resource can be exploited at no cost by the young households and provided to production. A joy-of-giving bequest motive motivates the transfer of the unexploited resource to the heirs. The study of intertemporal equilibrium reveals three puzzles neglected by the literature on sustainability. First, the existence of a bequest motive does not automatically guarantee a sustainable future. Second, human exploitation may preserve the resource in equilibrium but at a sub-optimal rate; in this case, both those who exploit too much and those who do not exploit enough should run a capital stock lower than the golden rule level. Third, there exist fluctuating transitions to a sustainable future in which some generations are worse off than both their ascendants and their descendants.

The General Theory of Transformational Growth: Keynes After Sraffa

Abstract: Preface Acknowledgments Part I History or Equilibrium?: 1 The idea of transformational growth 2 The stylized facts of the old business cycle and the new Part II Method and Approach: The Active Mind: 3 Conceptual truths and empirical observation 4 Rationality, structure and behavior Part III Money and the Golden Rule: 5 Circulation and production: the need for money Appendix: recent theories of circulation 6 Circulation and instability: the supply of money Part IV The Wage-Profit Trade-Off: 7 The classical system: the Golden Rule, labor, and the wage-profit trade-off Appendix: a numerical example 8 The classical system: gravitation and market adjustment 9 Cycles and growth: market adjustment in craft conditions Part V Investment and Mass Production: 10 Demand growth, pricing and investment plans 11 Inflation, employment, and market adjustment in mass production Appendix: stability of the modes of operation Part VI Money and Fluctuations in the Modern Economy: 12 Money and interest in the Keynesian system 13 Growth and cycles: financially constrained instability under mass production Appendix: Stability of modes of operation Conclusions: 14 Keynesian themes on classical grounds Bibliography Index

Puzzling over sustainability: an equilibrium analysis

Abstract: In this paper we model an overlapping generations economy in which individuals are endowed with a renewable resource. This resource can be exploited at no cost by the young households and provided to production. A joy-of-giving bequest motive motivates the transfer of the unexploited resource to the heirs. The study of intertemporal equilibrium reveals three puzzles neglected by the literature on sustainability. First, the existence of a bequest motive does not automatically guaranteea sustainable future. Second, human exploitation may preserve the resource in equilibrium but at a sub-optimal rate; in this case, both those who exploit too much and those who do not exploit enough should run a capital stock lower than the golden rule level. Third, there exist fluctuating transitions to a sustainable future in which some generations are worse off than both their ascendants and their descendants.

The Golden Rule and Business Ethics: An Examination

Abstract: The phenomenon of globalization of markets has been accompanied by calls for a globalization of ethical norms. One principle often referred to in such calls is the so-called Golden Rule. The rule, often stated as “Do unto others as you would have others do unto you,” has long been used and referenced in the business literature. But those who use it often do so without full realization of the rule itself and what it stands for. This paper examines the history, meaning, and problems of the rule and attempts to show, through a case analysis, how these problems surface when using the rule in a business context. In so doing it attempts to clarify exactly what the rule means and how it can fit into a universal code of morality.

Dynamic Controllability with Overlapping targets: A Generalization of the Tinbergen-Nash Theory of Economic Policy

Abstract: We generalize some recent results developed in static policy games with multiple players, to a dynamic context. We find that the classical theory of economic policy can be usefully applied to a strategic context of difference games: if one player satisfies the Golden Rule, then either all other players' policies are ineffective with respect to the dynamic target variables shared with that player; or no Nash Feedback Equilibrium can exist, unless they all share target values for those variables. We extend those results to the case where there are also non-dynamic targets, to show that policy effectiveness (a Nash equilibrium) can continue to exist if some players satisfy the Golden Rule but target values differ between players in the non-dynamic targets. We demonstrate the practical importance of these results by showing how policy effectiveness (a policy equilibrium) can appear or disappear with small variations in the expectations process or policy rule in a widely used model of monetary policy.

The Impact of Simple Fiscal Rules in Growth Models with Public Goods and Congestion

Abstract: In this paper we examine the implication of a simple class of fiscal rules for long-run economic growth and welfare. The Golden Rule of Public Finance that we examine is motivated by institutional arrangements in countries such as Germany and the UK. We find that rules that seek to limit government borrowing to productive investment spending have a clear justification in terms of growth and welfare when government-provided goods are otherwise excessively provided. Even in the case where it is private consumption that is excessive, the Golden Rule of Public Finance is likely to be good from a growth perspective, but the welfare effects are more ambiguous.

Fiscal rules and public investment

Abstract: This paper examines the link between fiscal rules and public investment both normatively and empirically. We first review the arguments for and against including public investment spending in a fiscal deficit rule. We then seek to assess the determinants of public investment, with a special focus on the role of the fiscal rules embodied in EMU. We conclude that there are practical difficulties precluding the introduction of a "golden rule" and that there is virtually no evidence that EMU would have affected public investment. Therefore, the focus on safeguarding the level of public investment is somewhat misplaced; instead, one should focus on safeguarding its productivity.

Fiscal Rules And Public Investment

Abstract: This paper examines the link between fiscal rules and public investment both normatively and empirically. We first review the arguments for and against including public investment spending in a fiscal deficit rule. We then seek to assess the determinants of public investment, with a special focus on the role of the fiscal rules embodied in EMU. We conclude that there are practical difficulties precluding the introduction of a "golden rule" and that there is virtually no evidence that EMU would have affected public investment. Therefore, the focus on safeguarding the level of public investment is somewhat misplaced; instead, one should focus on safeguarding its productivity.

The Strong Transfer Paradox in an Overlapping Generations Framework

Abstract: It is shown that in an overlapping generations model, a strong transfer paradox occurs through permanent transfer in a dynamically efficient region because of international capital mobility. A graphical explanation is also provided to show how the strong paradox arises.

Persistent Deficits, Growth and Indeterminacy: The Golden Rule of Public Finance Revisited

Abstract: In this paper, we look for long run and short run effects of fiscal deficits on economic growth. We extend the Barro (1990) endogenous growth model with productive public spending to public deficit and debt. The model shows a multiplicity of long run balanced growth paths (a high-growth and a low-growth steady states), and a possible indeterminacy of the transition path, which may be consistent with empirical literature that exhibits strong non-linear responses of economic growth to fiscal deficits. Under very general hypothesis , our model shows that the “Golden Rule of Public Finance”, which allows a government to run a deficit , only if this deficit is devoted to public investment, leads to a lower balanced growth path in the long run. In the short run, on the other hand, according to multiplicity, the effect of public deficit impulses depends on the initial level of public debt. Starting from the high-growth steady state, the rate of economic growth may initially increase; thus the welfare effect of a deficit-financed increase in productive public expenditures depends on parameters. Starting from the low-growth steady state, the effect of a public deficit impulse is subjected to expectations on public debt sustainability. JEL classification: H62, H63, E62

Reform of the Stability and Growth Pact: Reducing or Increasing the Nuisance

Abstract: This paper aims at providing a quantitative assessment of different proposals for reforming the Stability and Growth Pact by extending a counterfactual experiment performed in Eichengreen and Wyplosz (1998). Using estimated coefficients from a reduced form model, we simulate the path of the output gap for the largest Euro zone countries (France, Germany, Italy) after imposing limits to structural deficit according to different fiscal rules (structural deficit rules, golden rules and rules that incorporate the stock of debt). For each of these countries we can rank the different reform proposals in terms of output loss over the period considered. Our analysis has the merit of using a uniform method and hence allow a comparison across countries and across rules. The main results of the experiment, which emerge robustly, are (a), that the golden rule would be the most beneficial both using individual country's criteria and global criteria; and (b) that the status quo, the Maastricht rule, is less restrictive than many currently debated alternatives.

Fiscal Federalism in Switzerland : Relevant Issues for Transition Economies in Central and Eastern Europe

Abstract: Its highly fragmented structure of local governments and serious horizontal fiscal imbalances make Switzerland a surprisingly powerful model for Eastern European countries that are currently facing the challenge of fiscal decentralization. In spite of the substantial differences in the tradition and current practice of intergovernmental fiscal relations, transition economies may learn valuable lessons from the Swiss case in the fields of direct democracy, horizontal cooperation, expenditure and revenue assignment, and fiscal discipline. Among other conclusions, the paper suggests that subnational authorities can effectively fend off recentralization attempts of the central government if they engage in spontaneous cooperation to enhance the efficiency of public service provision. Together with an adequate fiscal equalization scheme, interjurisdictional cooperation also permits the reconciliation of the objective of an increasing devolution of powers with the existing regional disparities. It is also shown that the principle of subsidiarity can best be safeguarded by anchoring the expenditure and revenue powers of subnational governments in the constitution or in a similarly strong law. With regard to fiscal discipline, the combination of a golden rule with direct democratic instruments of budget control is proven to be successful in enhancing the accountability of local politicians toward their constituency.

"The Golden Rule": Only a starting point for quality care.

Abstract: The Golden Rule guides people to choose for others what they would choose for themselves. The Golden Rule is often described as 'putting yourself in someone else's shoes', or 'Do unto others as you would have them do unto you'(Baumrin 2004). The viewpoint held in the Golden Rule is noted in all the major world religions and cultures, suggesting that this may be an important moral truth (Cunningham 1998). The Golden Rule underlies acts of kindness, caring, and altruism that go above and beyond "business as usual" or "usual care" (Huang, 2005). As such, this heuristic or 'rule of thumb' has universal appeal and helps guide our behaviors toward the welfare of others. So why question the Golden Rule? Unless used mindfully, any heuristic can be overly-simplistic and lead to unintended, negative consequences.A heuristic is a rule of thumb that people use to simplify potentially overwhelming or complex events. These rules of thumb are largely unconscious, and occur irrespective of training and educational level (Gilovich, Griffin & Kahneman 2002). Rules of thumb, such as the Golden Rule, allow a person to reduce a complex situation to something manageable-e.g., 'when in doubt, do what I would want done'. Because it is a simplifying tool, however, the Golden Rule may lead to inappropriate actions because important factors may be overlooked.In this article we describe "The Golden Rule" as used by administrators, supervisors, charge nurses, and CNAs in case studies of four nursing homes. By describing use of this rule-of-thumb, we aim to challenge nurses in nursing homes to: 1) be mindful of their use of "The Golden Rule" and its impact on staff and residents; and 2) help staff members think through how and why "The Golden Rule" may impact their relationships with staff and residents.

A theory of low inflation in a non Ricardian economy with credit constraints

Abstract: This paper explores the relationship between the severity of credit constraints and long run inflation in a simple non Ricardian setting. It is shown that a low positive inflation can loosen credit constraints and that this effect yields a theory of the optimal long run inflation target with no assumption concerning nominal rigidities or expectation errors. Credit constraints introduce an un-priced negative effect of the real interest rate on investment. Because of this effect, the standard characterization of economic efficiency with the Golden Rule fails to apply. When fiscal policy is optimally designed, the first best allocation can be achieved thanks to a positive inflation rate and a proportional tax on consumption.

Regla de Oro, sostenibilidad y regla fiscal contracíclica

Abstract: The current fiscal policy does not differentiate capital expenditure from current expenditure. Since the global deficit target is fixed according to the present fiscal policy rule, the non financial expenditure becomes pro cyclical, and the public investment is adjusted to meet the targeted deficit. As a result, the public investment has dramatically decreased which, in turn, has affected the international competitiveness and the economic and social development of the Peruvian society. This paper proposes: 1) change the public expenditure policy public investment by eliminating its pro cyclical bias; and 2) redefining the system of fiscal accounting. To meet this purposes the budget must be divided in two parts: the current budget with a saving or primary surplus target, and the investment expenditure based on a rule of directing the public debt only to finance this kind of expenditure over the economic cycle. This is the so called Public Investment Golden Rule. To this Golden Rule is added other according to which the ratio of public net debt must be sustainable during the economic cycle. Finally, it’s proposed to adopting the new IMF accounting system. The Golden Rule becomes pretty velar in the context of this new system. When the operational result becomes equal to cero, the net investment becomes equal to the public debt. Hence, the null operational result according to the new accounting system is the only one which is consistent with the Golden Rule.

On the Five Laws of Library Science

Abstract: Having been greatly influenced by information technology, the content of the Five Laws of Library Science has changed a lot; but its essence is still of instructional significance for the library development, it is still the golden rule that librarians must follow in their work.

Persistent Deficits, Growth and Indeterminacy: The Golden Rule of Public Finance Revisited

Abstract: In this paper, we look for long run and short run effects of fiscal deficits on economic growth. We extend the Barro (1990) endogenous growth model with productive public spending to public deficit and debt. The model shows a multiplicity of long run balanced growth paths (a high-growth and a low-growth steady states), and a possible indeterminacy of the transition path, which may be consistent with empirical literature that exhibits strong non-linear responses of economic growth to fiscal deficits. Under very general hypothesis , our model shows that the “Golden Rule of Public Finance”, which allows a government to run a deficit , only if this deficit is devoted to public investment, leads to a lower balanced growth path in the long run. In the short run, on the other hand, according to multiplicity, the effect of public deficit impulses depends on the initial level of public debt. Starting from the high-growth steady state, the rate of economic growth may initially increase; thus the welfare effect of a deficit-financed increase in productive public expenditures depends on parameters. Starting from the low-growth steady state, the effect of a public deficit impulse is subjected to expectations on public debt sustainability. JEL classification: H62, H63, E62

The Golden Rule

Abstract: Should you always do unto others as you would have them do unto you? Brad Hooker investigates a seemingly plausible-looking moral principle: the Golden Rule.

The Golden Rule in Transfer Pricing Regulation

Abstract: In this paper we analyze the optimal regulation of an internationally integrated monopolist, producing in one country and selling in another country. The monopolist’s pricing policy is constrained by transfer pricing regulations, and is subject to different tax rates on profits in the two countries. The governments of the two countries can use their tax rates as regulatory instruments, and they also determine an arm’s length interval of acceptable transfer prices. The two governments can cooperate in order to maximize world welfare, or they can each try to maximize their own country welfare. It is shown that in several of the solutions governments apply a golden rule. This rule requires that the firm realizes all profits in the manufacturing country, while no profits are made in the retailing country. This can be obtained by choosing a sufficiently high (low) tax rate in the retailing (manufacturing) country, or by appropriately fixing the transfer price.

Population, Impartiality and Sustainability in the Neoclassical Growth Model

Abstract: A resolution is offered to Koopmans’ (1965, 1967a) "paradox of the indefinitely postponed splurge"-i.e. the incompatibility of undiscounted utilitarianism and population weighting in the context of the infinite-horizon neoclassical growth model with exponential population growth. The resolution builds on the conflict between splurging (i.e. dissaving) and sustainability. Consumption paths which contain splurges are not sustained, because they involve reductions in consumption at some point. Thus disallowing unsustained paths removes the incentive to save for a splurge. A modified utilitarian objective is presented which embodies the commitment to sustainability, as well as impartiality and the golden rule. Maximization over the neoclassical technology yields a monotonically increasing path to the golden rule. The underlying ethical position is described as an intergenerational contract: early generations are willing to sacrifice some consumption to build up the capital stock while future generations are morally obligated to limit consumption to the golden rule.