Showing papers on "Golden Rule (fiscal policy) published in 2011"

The golden rule of public finance and the composition of government expenditures: a growth and welfare analysis

Abstract: This paper employs an endogenous growth model to study the growth and welfare effects of the golden rule of public finance. Two versions are compared, whereby government deficits are restricted for the use of public investments. It is shown that the growth effect of the golden rule depends on what kind of expenditure is adjusted to meet debt obligations. A transition from a balanced budget to a golden rule is performed to study welfare. The results indicate that a budget rule with detrimental growth effects can still have positive welfare implications, and vice versa, if the composition of government expenditures and transitional dynamics are taken into account.

Fiduciary Duty, Statute, and Pension Fund Governance: The Search for a Shared Conception of Sustainable Investment.

Abstract: Fiduciary duty is the golden rule 'regulating' the relationship between trustees and beneficiaries. In principle, it regulates behaviour by pre-empting those actions that would harm the interests of beneficiaries while promoting duties of care consistent with the interests of those that stand to gain from well-intentioned and responsible decision-making. But, in many respects, fiduciary duty is a chimera: it looks to convention rather than forward to innovation in investment management. As such, governance policies and practice must provide the instruments that simple recipes of fiduciary duty are ill-equipped to provide. In this paper, I argue that the design and governance of investment management institutions is, actually, more important than honouring the principle fiduciary duty which, in the context of Anglo-American statute, is increasingly empty. In doing so, I re-read the classic cases that define the principle while identifying the problems which the golden rule has been unable to resolve. This is the back-drop for reconsidering the virtues or otherwise of a governance-focused regulatory regimes. In the penultimate section of the paper I focus on the mechanisms currently used to cultivate a regulatory regime that is at once long-term oriented and responsive to the climate change challenge that confronts humanity.

Optimal growth and the golden rule in a two-sector model of capital accumulation

Abstract: We contribute to the literature on optimal growth in two-sector models by solving a Ram- sey problem with a concave utility function. The unique possible steady-state is independent of initial conditions and of the instantaneous utility function, but not of the discount rate, and is characterized by a wage-rental ratio depending solely on the technology of the capital sector. For an initially low-capital economy, we show that the wage-rental ratio increasingly converges to its balanced value during transition. If the consumption sector is relatively capital-intensive, the relative price of capital increases during transition. If the investment sector is relatively more capital-intensive, it decreases. We also prove that a negative shock on the subjective rate of impatience, that makes the social planner more patient, leads to an immediate positive jump in asset prices.

Seigniorage Revenues in Pakistan

Abstract: Developing economies share two common features in their fiscal positions: (a) a large gap between their resources and expenditures, and (b) limited capacity of domestic financial markets to absorb the government debt to finance the gap. Moreover, most of them also face constraints in getting external financing due to inadequate international credit ratings. As a consequence, they often rely heavily on financing the deficit by printing new money – also called seigniorage. 1 But this fuels inflation in the economy. Inflation is just like a tax (Mankiw, 1987) as it generates revenues for the government – though distorts private sector behavior. Seigniorage revenues are defined as the amount of real resources obtained by the government by injecting new base money (Cukierman, 1992). The expected amount of revenue from printing of money depends upon demand for the base money, real growth, and elasticity of demand for real balances with respect to inflation and income. Seigniorage is also defined as opportunity cost of holding money. However, for measuring the amount of seigniorage, its former definition (i.e., new money creation) is used because the opportunity cost approach needs choice of a “true” interest rate which is hard to identify. While it is convenient to use monetary measure of seigniorage, it has issues. Auernheimer (1974) reports that monetary seigniorage can only be used under the assumption of golden rule – that is over the economic cycle, the government borrows only to invest and not to fund current spending. If this assumption is violated, monetary seigniorage underestimates the total cost imposed on the private sector and thus overstates the revenue maximizing rate of inflation. In case of Pakistan, Arby (2006) estimates the seigniorage revenues for Pakistan with the conventional definition of monetary seigniorage. However, as argued above, this approach is not justified as even revenue deficit is often financed through borrowing by the government in Pakistan. The alternate approach is

Overlapping generations economy, environmental externalities, and taxation

Abstract: I set up in this paper an overlapping generations economy with envi-ronment degrading itself and pollution resulting from both consumption and production to show that there always exists an inter-temporal equi-librium and to determine the competitive steady state. This steady state is compared with the equilibrium steady state in the social benevolent planner's point of view. The paper shows the optimal golden rule allo-cation which maximizes the total utility of all generations, and whenever the capital ratio in the competitive framework is higher than the golden rule capital ratio, the economy stands on the dynamically inecient point. The width of the inecient range of capital ratio depends positively on the environment maintaining technology and depends negatively on the cleanness of production technology. For such any competitive economy, I introduce some combinations of taxes and transfer with purpose of de-centralizing the best steady state attainable through the good and factors markets.

Aranyszabály helyett adósságfék - a német példa = Debt-brake instead of the golden rule - the caseof Germany

Abstract: Az Europai Unio megujulo gazdasagi kormanyzasi rendszerenek egyik meghatarozo pillere a diszkrecionalis gazdasagpolitikaval szemben megfogalmazott szabalyalapusag lesz. A minden korabbinal erősebb es velhetően hatekonyabb szabalyok bevezetesenek legelkotelezettebb hive Nemetorszag. Az elmult evtizedekben a folyo koltsegvetesi kiadasok hianybol tortenő finanszirozasanak tilalmat előiro aranyszabalyt inkabb kevesebb, mint tobb sikerrel alkalmazo Nemetorszag most arra vallalkozott, hogy nem csak sajat hataskorben vezeti be az un. adossagfeket, hanem kovetendő peldakent allitja azt a tobbi tagorszag ele is. Irasunkban az aranyszabaly, illetve az adossagfek előnyeit es hatranyait vesszuk szamba a nemet tapasztalatok felhasznalasaval. / === / The need to strengthen rules-based fiscal policy has emerged as a widely shared consensus amongst policy-makers in the recent economic and financial crisis. Germany has become the most devoted advocator of the new regime, where more innovative and effective fiscal rules are supposed to play an even bigger role than before. Germany supports such a move however not only in rhetoric but also in practice. It decided to abandon its several decade old golden rule and to adopt a more sophisticated one, the so-called debt-brake. This article provides a cost-benefit analysis of both the previous and the new fiscal rule.

Has the 'golden rule' lost its aura? Revisiting multimarket contact in the U.S. domestic airline industry

Abstract: A seminal work in the mid-nineties finds that airlines charge higher fares in markets where they engage in extensive multimarket contact, thus empirically attesting to industry expert claims that airlines live by the 'golden rule' (i.e., avoid undercutting in jointly contested routes). Our research revisits this hypothesis by including two hitherto ignored airlines Southwest Airlines and JetBlue Airways who are practitioners of the everyday low price (EDLP) strategy. We find that this golden rule is violated when airlines engage in multimarket contact with these two airlines, and identify firm-specific differences in the overall pricing strategy as the source of this anomaly.

The Borrowing Behaviors of French Regions

Abstract: This paper provides empirical evidence of the heterogeneous borrowing behaviours of French regions, despite a common accountability constraint that forces them to balance their budget and to borrow only to finance investment expenditure (golden rule). To this end, we conduct a quantile regression analysis. The heterogeneity is very pronounced when the regions face a negative shock on debt, for instance a tightening of financial conditions. Our findings may be due to the fact that the Golden rule can be thought of as a “soft” rule if some local administrations believe that a financial rescue from the central government is automatic. Hence, in the French case the bailing-out hypothesis cannot be rejected. Classification JEL: H74, E62, K34, R5

Optimal Monetary Policy and Finite Horizons

Abstract: This paper studies the Ramsey optimal monetary policy in the baseline New Keynesian model with capital accumulation and overlapping generations. With balanced-budget fiscal policy, the generational turnover effect reduces the aggregate capital stock, consumption, and social welfare. The traditional trade-off between nominal price stickiness and monopolistic competition becomes more intense, so that the monetary authority seems to be motivated to close the gap between the inefficient steady state and the modified golden rule. Optimal monetary policy, however, obtains a stabilizing rather than an expansionary nature, because the Ramsey planner is concerned with both current and future generations. Optimal policy becomes countercyclical, but deviations from strict price stability entail a social welfare cost below the lower bound described by Lucas (2003).

High interest rates: the golden rule for bank stability in the Diamond-Dybvig model

Abstract: In a companion paper, Bertolai et al. (2011) build on Peck-Shell (2003) economies and obtain strong implementation in perturbations of optimal contracts. Since bank runs are eliminated with distortions that become very small when the population grows, a pressing issue is whether an alternative specification can generate the costly crisis that are common in history. We find, in this paper, an affirmative answer in the context of the Diamond-Dybvig (1983) model, and uncover the role played by societal weights on future consumption and solvency risk. An extension of the Ennis-Keister (2009) algorithm shows the impact of run strategies and implicit rates of interest on the formation of expectations, in line with some classical views.

The Golden Rule in Applied Ethics: How to Make Right Decisions in Theory and Practice

Abstract: “Treat others as you want to be treated” is one of the most familiar formulations of the Golden Rule. In this article, seven different expressions are described that can all be seen as varieties of the same rule. The Golden Rule can be a very useful instrument for Applied Ethics in both theoretical and practical moral thinking. However, none of these variations gives a definite moral advice. The reason is that the Golden Rule does not contain any reference to value standards. It rather serves as a rule of reversibility and consistency that tells us that we should act upon others as we would like to be treated by them, i.e. the Golden Rule asks for a harmony between our moral actions and our desires. This Principle of Reciprocity may lead to a number of misconceptions, but several examples serve to gain a morally acceptable understanding of this universal moral code.