Showing papers on "Golden Rule (fiscal policy) published in 2012"
TL;DR: In this paper, the authors examine the institutional implications of the "golden rule" on the role of the political and judicial branches, both in the states and in the EU, and argue that, while the domestic effects of such a rule are likely to vary from one state to another, the Fiscal Compact systematically enhances the powers of the EU institutions to direct and police the budgetary policies of the states.
Abstract: The paper analyzes the central provision of the recently enacted Fiscal Compact, which directs member states of the European Union (EU) to incorporate into their constitutions a “golden rule”, i.e. a requirement that yearly budgets be balanced. The purpose of the paper is to examine – by surveying the introduction of these pervasive budgetary constraints in four selected states (Germany, France, Italy and Spain) – the institutional implications that the “golden rule” has on the role of the political and judicial branches, both in the states and in the EU. The paper argues that, while the domestic effects of the “golden rule” are likely to vary from one state to another, the Fiscal Compact systematically enhances the powers of the EU institutions to direct and police the budgetary policies of the states, thus increasing centralization in the EU architecture of economic governance. The paper contrasts this development with the federal experience of the United States (US). In a comparative perspective, in fact, it appears that while most US states are also endowed with “golden rules” in their constitutions, the federal government never played a role in the adoption of these balanced budget rules and still today is barred from interfering with the budgetary processes of the states. In conclusion, the paper suggests that an unexpected paradox emerges in the new constitutional architecture of the EU: although in crafting the institutional response to the Eurozone crisis state governments have repeatedly discarded a US-like federal model as being too centralized and centripetal for the EU, they have ended up establishing a regime that is much less respectful of state sovereignty than the US federal system.
51 citations
TL;DR: It is established that a nonstationary path that converges to a capital stock above the smallest golden rule may indeed be efficient, and has the important implication that “capital overaccumulation” need not always imply inefficiency.
11 citations
TL;DR: In this article, the authors introduced money into an overlapping generations model with endogenous growth and showed that as long as the modified golden rule is attained, Friedman rule is optimal, regardless of the ability of the government to internalize the externality and control the level of human capital.
Abstract: This paper introduces money into an overlapping generations model with endogenous growth. The model, due to Docquier et al. (2007), exhibits a positive intergenerational externality which precludes its laissez-fair equilibrium to be optimal even if the government can control the level of physical capital and set it to satisfy the modified golden rule. The main message of the paper is that, as long as the modified golden rule is attained, Friedman rule is optimal. The result holds regardless of the ability of the government to internalize the externality and control the level of human capital. Other results include: (i) violation of Friedman rule for a different second-best environment wherein human capital accumulation is controlled but not physical capital accumulation; (ii) existence of a negative relationship between money growth rate and the economy's endogenous growth rate, and (iii) non-uniqueness of Friedman rule.
7 citations
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TL;DR: The authors analyzes the dynamics of public debt in a simple two-period overlapping generations model of endogenous growth with productive public goods, with particular attention devoted to the golden rule and conditions under which multiple equilibria may emerge under that rule are characterized.
Abstract: This paper analyzes the dynamics of public debt in a simple two-period overlapping generations model of endogenous growth with productive public goods. Alternative fiscal rules are defined, with particular attention devoted to the golden rule. Conditions under which multiple equilibria may emerge under that rule are characterized. The analysis is then extended to consider the case of an endogenous risk premium, a generalized golden rule, and network externalities. If network effects are sufficiently strong, an increase in public investment may shift the economy from a low-growth equilibrium to a steady state characterized by both higher public debt ratios and higher output growth. This shift may enhance welfare as well. These results illustrate the importance of preserving the allocation of resources to specific types of public investment, even in a context of fiscal retrenchment.
7 citations
TL;DR: In this paper, the role of the two-part golden rule as a demarcation line between efficient and inefficient steady states in the neoclassical two-generations-overlapping model with heterogeneous agents was studied.
6 citations
01 Jan 2012
TL;DR: In this paper, the authors show that the success story of the so-called "debt brake" on the federal constitutional level has to be revised substantially, and they also identify two important practical problems of Swiss fiscal policy, namely the severe limits it imposes on the government's ability to act in times of economic downturn and the observable neglect of public investment.
Abstract: At a time with growing fears of excessive government debt and of overburdened future generations Swiss fiscal policy seems to be the virtuous role model to be followed. Whereas almost everywhere else government debt has been increasing dramatically after the global economic and financial crisis in 2008, in Switzerland it decreased steadily ever since 2003. According to the official and widespread interpretation this success is essentially a result of the introduction of the so called 'debt brake' on the federal constitutional level. The present study, however, shows that the - at first glance plausible - success story has to be revised substantially. In order to show this the study firstly deals with the question whether the 'debt brake' is indeed responsible for the impressive process of budget consolidation. Secondly, the theoretical arguments in favour of strict limits for government deficits and debt are reconsidered and it is shown that the Swiss debt brake violates the golden rule of fiscal policy according to which (net) public investment should be financed by credit. Thirdly, two important practical problems of Swiss fiscal policy are identified, namely the severe limits it imposes on the government's ability to act in times of economic downturn and the observable neglect of public investment spending. Fourthly, specific solutions addressing the problems identified are developed.
6 citations
01 Jan 2012
TL;DR: The possibility of such a failure is not to be dismissed as mentioned in this paper, and therefore, eurozone leaders should reflect on their design of national Golden Rules and reflect on the real risk that they will undercut public investment.
Abstract: If introduced successfully, national Golden Rules will completely overturn fiscal governance in the eurozone. Golden Rules would almost always be more stringent than EU-level fiscal norms. EU fiscal norms will hence evolve into a safety net in case a Golden Rule fails. The possibility of such a failure is, indeed, not to be dismissed. Because of the severity of the Golden Rules, eurozone leaders should reflect on their design. There is a real risk that they will undercut public investment, which would be at the cost of the EU’s other long-term challenges.
6 citations
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TL;DR: In this paper, the authors compare the performance of different fiscal compact rules with the Maastricht 3% deficit limit (status quo), and with an "investment" rule leaving room for public investment, concluding that the investment rule emerges robustly as the one guaranteeing the lower output loss.
Abstract: This paper contributes to the debate on fiscal governance for the European Monetary Union, assessing the different fiscal rules currently discussed. We simulate a small scale macroeconomic model with forward looking agents, augmented with a public finances block. We account for both the positive (output stabilization) and negative (via risk premia) effects of debt and deficit. By the appropriate choice of the exogenous fiscal variables, in the fiscal block, we replicate the working of the rules embedded in the so-called "fiscal compact": a balanced budget rule (the "new golden rule"), and the debt reduction rule (to reach 60% of GDP in 20 years). We compare these rules with the Maastricht 3% deficit limit (status quo), and with an "investment" rule leaving room for public investment. We evaluate the performance in terms of output loss during a fiscal consolidation, as well as following demand and supply shocks in steady state. All rules guarantee long run sustainability. The investment rule emerges robustly as the one guaranteeing the lower output loss, followed by the status quo. The "fiscal compact" rules appear to be recessionary
5 citations
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01 Jan 2012
TL;DR: In this paper, the authors show how Europeans have organized the six principal economic activities trade, finance, enterprise, innovation, labor, and government in unique ways, and the changes needed to make trade and finance will not be as hard as those to improve enterprise and innovation.
Abstract: Europe's growth will have to be golden in yet another sense. Economic prosperity has brought to Europeans the gift of longer lives, and the continent's population has aged a lot over the last five decades. Over the next five, it will age even more by 2060; almost a third of Europeans will be older than 65 years. Europe will have to rebuild its structures to make fuller use of the energies and experience of its more mature population's people in their golden years. These desires and developments already make the European growth model distinct. Keeping to the discipline of the golden rule would make it distinguished. This report shows how Europeans have organized the six principal economic activities trade, finance, enterprise, innovation, labor, and government in unique ways. But policies in parts of Europe do not recognize the imperatives of demographic maturity and clash with growth's golden rule. Conforming growth across the continent to Europe's ideals and the iron laws of economics will require difficult decisions. This report was written to inform them. Its findings the changes needed to make trade and finance will not be as hard as those to improve enterprise and innovation; these in turn are not as arduous and urgent as the changes needed to restructure labor and government. Its message the remedies are not out of reach for a part of the world that has proven itself both intrepid and inclusive.
4 citations
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TL;DR: In this paper, the optimal capital accumulation in a two-period OLG model where lifetime is risky and varies across individuals was analyzed, and it was shown that, under plausible conditions, the egalitarian optimum involves a higher capital and a lower fertility than the utilitarian optimum.
Abstract: Individuals save for their old days, but not all of them enjoy the old age. This paper characterizes the optimal capital accumulation in a two-period OLG model where lifetime is risky and varies across individuals. We compare two long-run social optima: (1) the average utilitarian optimum, where steady-state average welfare is maximized; (2) the egalitarian optimum, where the welfare of the worst-off at the steady-state is maximized. It is shown that, under plausible conditions, the egalitarian optimum involves a higher capital and a lower fertility than the utilitarian optimum. Those inequalities hold also in a second-best framework where survival conditions are exogenously linked to the capital level.
3 citations
TL;DR: In this paper, the authors examined whether a non-instantaneous relationship between CO2 emission and temperature increase can affect asymptotic stability in a Golden rule context, when utility is not only determined by the level of per capita consumption but also allows for the negative influence of the temperature increase.
Abstract: This paper examines whether a non-instantaneous relationship between CO2 emission and temperature increase can affect asymptotic stability in a Golden rule context, when utility is not only determined by the level of per capita consumption but also allows for the negative influence of the temperature increase. In particular, by exploiting a difference-differential equation (DDE) framework, we determine an interval for the steady state temperature increase which characterizes asymptotic stability completely. We apply this framework to assess a Green Solowian Rule steady state, suggesting that any lacks or excesses in the saving rate of an economy with respect to the optimal growth path are affected by the propensity to prevent future climate catastrophes. It is important to emphasise that a lower return of physical capital, which generally affects developed countries, adversely influences asymptotic stability.
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TL;DR: In this article, the authors highlight the importance of debt-related fiscal rules and derive growth-maximising public debt ratios from a simple theoretical model, based on evidence on the productivity of public capital.
Abstract: This paper highlights the importance of debt-related fiscal rules and derives growth-maximising public debt ratios from a simple theoretical model. On the basis of evidence on the productivity of public capital, we estimate public debt targets that governments should try to maintain if they wish to maximise growth for panels of OECD, EU and euro area countries, respectively. These are not arbitrary numbers, as many of the fiscal rules in the literature suggest, but are founded on long-run optimising behaviour, assuming that governments implement the so-called golden rule over the cycle; that is, they contract debt only to finance public investment. Our estimates suggest that the euro area should target debt levels of around 50% of GDP if member states are to have common targets. That is about 15 percentage points lower than the estimate for the growth-maximising debt ratio in our OECD sample and comfortably within the Stability and Growth Pact's debt ceiling of 60% of GDP. We also indicate how forward looking budget reaction functions fit into a debt targeting framework. JEL Classification: H63, E22, O40
01 Jan 2012
TL;DR: In this paper, the authors investigate how individual biases and environmental characteristics affect ethical decision-making among entrepreneurs and propose a conceptual framework to evaluate whether entrepreneurs are more or less ethical than other business agents.
Abstract: Are entrepreneurs more or less ethical than other business agents? How do individual biases and environmental characteristics affect ethical decision-making among entrepreneurs? Our conceptual fram...
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TL;DR: In this article, the authors show that the European fiscal federalism is still far away from becoming reality and that the new instruments chosen for the new stability of the European Monetary Union will be the task of the Member States themselves.
Abstract: In the last four years, a significant part of the European Union members has recorded a real decline in the sustainability of their public debt. The failure of Greece, Italy, Belgium or Spain to easily find funding at previous interest rates has induced the fear that the European Monetary Union would disintegrate. Such as scenario is not realistic because does not take into account the economic interdependencies that have been created between the countries participating at the monetary zone. Nevertheless, we can say that the Stability and Growth Pact which aimed towards the coordination of national fiscal policies for ensuring the stability and prudence of the budgetary climate, has failed. This failure was primarily due to the lack of specific sanctions for those members that have not fought against the fiscal imbalances and secondly to the stopping the steps forward towards a common fiscal policy. Thus, we can say that the European Monetary Union is driven now by the wrong rule of “no taxation with representation”. For these reasons, this paper aims at showing that the European fiscal federalism is still far away from becoming reality and that the new instruments chosen for the new stability of the European Monetary Union will be the task of the Member States themselves. This paper will also review the main rules that are projected to be the source for the future European financial stability and growth: the balanced budgets and the deficits built only on the “Golden Rule” premises, for which other amendments on European Treaties are expected.
TL;DR: In this paper, the authors examined the sustainability for future China telecom operators' growth, and the China NGIT future operations will depend on the policies and regulations that government will practice.
Abstract: In March 2011, China released its 12th Five-Year Plan, (FYP, 2011-2015) which contains road maps and goals to guide industries and local government for the implementation of the plan and the outcome will then be evaluated. Willy Shih, professor of Harvard Business School, listed eleven items for the Next Generation Information Technology (NGIT), which is one of the seven Strategic Emerging Industries (SEIs) that government will support in this plan and it is expected these targeted seven priority industries will increase GDP contribution from 2% to 8% by 2016 and 15% by 2020, and will be supported by a budget allocation of RMB 10 trillion (USD. 1.52 trillion) over the five year period. The main NGIT items include: Next-generation mobile communications, Next-generation core Internet equipment, Convergence of Telecom/ Cable TV/ Internet networks, Cloud Computing, etc. From a user point of view: Users today will want information available right away, and don’t care how the digital data is transferred or through which channels. Therefore, we looked at this as one giant system functioning together. The whole system’s functionality, including the policy, is the main reason for attaining the sustainability of the telecom industry’s future growth. The Objective of this paper is to try to examine the sustainability for future China telecom operators’ growth, and the China NGIT future operations will depend on the policies and regulations that government will practice. The sustainability can be categorized under several areas: the new technology including new standards has to be feasible, new services and new content has to be generated, new customers have to be created and most importantly new regulations and policies have to be in place. The sustainability relies also on the social-technical-economic factors; the new policies on these related areas in the 12th FYPs will be discussed. The Actor-Network Theory (ANT) used as an important tool for the case study in this paper it will be used to explain how the China governmental departments worked together to create a new policy or made new decisions in the past? The formation of the 12th FYPs and its main content along with three related cases studies will be discussed. Will these current Chinese ways still be sustainable in the future? Suggestions will be made followed by the Fair Division Problem Solution of the Corporative Game Theory to fit the special competition environment that China had. For example: three Telecom Operators working under the supervision of government and possessing most of the resources of the country for transferring information including: spectrums/ fiber backbones (land & ocean), but the division for the subscribers of these three telecom operators was not equally spread. (By March, 2012. Mobile Subscribers for China Mobile were 667million, China Unicom had 209million, China Telecom had 135million.) The Chinese government’s main concern was security of the information, for example, in China officially there was neither 3 X movies nor violent ones and the content on the web would be blocked if it was deemed inappropriate. The government also seriously monitored the telecom market’s healthy competition environment. Will this be enough for growth?The heuristic analysis and insights in this paper are based on achievable public information and documents such as China Daily, Marbridge Daily, available Web pages and interviews. The interesting trend predicted was that the three telecom operators seemed to be moving towards the Golden Rule from the subscriber number division? China is a developing country, the political system and economic path were all different from others, but still many ways and experiences can be shared and lessons can be learned for other countries. Investor opportunity is huge, but the mind set has to change and a new way of thinking adopted.
TL;DR: In this paper, it is shown that if and only if social planners have a discount rate on future consumption of zero does the golden rule follow, and if foreign investment also involves the transfer of technology, the tax is accordingly reduced.
Abstract: In a two-country, two-factor world, each is assumed to choose a golden rule path, but these paths differ because of divergent growth rates for labor (in efficiency units). In order to maintain these, it becomes necessary to impose a tax on the return to foreign-owned capital equal to the difference between the lower foreign rate and the higher home rate of the capital-importing country. It is also necessary to prevent undercutting of this difference in capital returns via adjustment of domestic production, as in the HOLS theorem. This is done by means of a supporting tariff on trade. When foreign investment also involves the transfer of technology, the tax is accordingly reduced. It is also shown, using the calculus of variations, that if and only if social planners have a discount rate on future consumption of zero does the golden rule follow.