Showing papers on "Golden Rule (fiscal policy) published in 2013"

The Euroland crisis and Germany’s euro trilemma

Abstract: This paper investigates the causes behind the Euroland crisis, particularly Germany’s role in it. It is argued that the crisis is not primarily a ‘sovereign debt crisis’, but rather a (twin) banking and balance of payments crisis. Intra-area competitiveness and current account imbalances, and the corresponding debt flows that such imbalances give rise to, are at the heart of the matter, and they ultimately go back to competitive wage restraint on Germany’s part since the late 1990s. Germany broke the golden rule of a monetary union: commitment to a common inflation rate. As a result, the country faces a trilemma of its own making and must make a critical choice, since it cannot have it all – perpetual export surpluses, a no transfer/no bailout monetary union, and a ‘clean,’ independent central bank. Misdiagnosis and the wrongly prescribed medication of austerity have made the situation worse by adding a growth crisis to the potpourri of internal stresses that threaten the euro’s survival. The crisis in Eu...

The fiscal compact, the 'golden rule' and the paradox of European federalism

Abstract: This Article 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"-that is, a requirement that yearly budgets be balanced. The purpose of the Article is to examine-by surveying the introduction of these pervasive budgetary constraints in four selected EU member 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 as a whole. The Article 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 EU member states, thus increasing centralization in the EU architecture of economic governance. The Article then contrasts this development with the federal experience of the United States. A comparative perspective sheds light on the fact that, while most U.S. states are also endowed with constitutional "golden rules," the federal government never played a role in their adoption and is barred from interfering with the budgetary processes of the states. In conclusion, the Article suggests that an unexpected paradox emerges in the new constitutional architecture of the EU: Although in crafting the institutional response to the Euro-zone crisis state governments have repeatedly discarded a U.S.-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 U.S. federal system.IntroductionOn March 2, 2012, twenty-five out of twenty-seven member states of the European Union (EU) agreed to sign in Brussels the Treaty on the Stability, Coordination, and Governance in the Economic and Monetary Union (TSCG).1 This treaty, generally referred to as the Fiscal Compact, was adopted under the pressures of financial markets, which, since 2008, have been threatening several countries of the Economic and Monetary Union (EMU) with the spectre of sovereign default.2 In this context, the treaty represents the latest, and allegedly conclusive, attempt to provide a satisfactory answer to the Euro-zone crisis.3 The Fiscal Compact raises a number of new issues in the fields of international law, EU law, and comparative constitutional law.4 Technically drafted as an international treaty, but functionally connected to the EU legal order, the Fiscal Compact pursues the goal of strengthening budgetary discipline in the member states of the Euro-zone.5 The enactment of the Fiscal Compact reflects the understanding that the existence of a common supranational currency (the Euro), coupled with a no-bail-out clause in Article 125 of the Treaty on the Functioning of the EU (TFEU), requires tighter fiscal constraints in the Euro-zone member states.6 In particular, this Article focuses on the obligation the Fiscal Compact imposes on signatory states to enact the so-called "golden rule"-a requirement that annual government budgets be balanced-in state constitutions.7 This requirement, which is unprecedented in the history of European integration, significantly increases the involvement of supranational institutions in the fiscal sovereignty of the states and is likely to affect the vertical balance of powers between the states and the EU.8This Article examines the "golden rule" articulated in the Fiscal Compact by tracing its origin in German constitutional law and assessing the institutional challenges that its adoption raises in four selected EU member states (Germany, France, Italy, and Spain) and at the EU level. The developments taking place in the EMU are then compared to the experience of the United States in the field of fiscal federalism. The EMU and the United States appear to share several common structural features. …

Do we need fiscal rules

Abstract: The public finances crisis has brought binding fiscal rules proposals back to the forefront. The paper analyses their justifications and specifications, either in a classical or in a Keynesian framework. In the recent period there is no evidence that public deficits were caused by fiscal indiscipline and induced too high interest rates; there is no evidence that economically relevant rules can be designed. The paper provides an analysis of fiscal rules implemented either at country level (like the UK golden rule), or at the EU level (the Stability and Growth Pact). The paper shows that fiscal rules did not work before and during the crisis. The paper discusses the EU project, the “Fiscal Pact”, which risks to paralyse fiscal policies and to prevent economic stabilisation. The priority today is not to strengthen public finance discipline but to question economic developments which make public deficits necessary to support output.JEL classification: E62.

The Rule of Prior Exhaustion of Domestic Remedies: Theory and Practice in International Human Rights Procedures

Abstract: The rule of exhaustion of domestic remedies is arguably the most important admissibility requirement in international human rights procedure. It plays a pivotal role, as an interface between international and national legal systems. Starting from the practice of diplomatic protection and some very succinct statutory provisions, it evolved over time, by and large through jurisprudential elaboration. Because international human rights bodies insist in applying it flexibly—treating it more as a golden rule than a rule set in stone—and because the number of exceptions over time has grown considerably, there is significant doubt as to the exact scope of the rule and its exceptions. This uncertainty causes twofold confusion. It leads to an excessive amount of petitions being filed when they should not, but also causes many petitions to remain unfiled because of doubts as to their admissibility. It is argued here that it is time for authoritative codification of the sprawling jurisprudence on this rule.

The Effect of Working Capital on Profitability: Evidence from Romania

Abstract: The golden rule of financial equilibrium state the noncurrent resources should finance noncurrent assets and current resources should finance current assets. Managing working capital suppose to provide cash, which is indispensable for a company to run its day-by-day activities. The main aim of this paper is to test for a sample of Romanian publicly companies if working capital is managed at an optimum level, and if companies hold too much or too less cash, which obviously would affect profitability. The results suggest that in order to increase profitability managers from Romanian publicly companies could increase profitability by reducing the number of days cash conversion cycle and, as second result, companies do not hold too much cash.

Fiscal Policy within a Common Currency Area - Growth Implications in the Light of Neoclassical Theory

Abstract: We examine the long-run impact of fiscal policy on economic growth under the conditions of an economic and monetary union (EMU). The analysis is based on the neoclassical growth model of a small (in economic terms) open economy in an EMU. The core assumptions are perfect capital mobility, which results in identical interest rates across the EMU, and perfect mobility of goods, which leads to the convergence of price levels. The model is based on standard neoclassical assumptions, i.e., the output is determined by the Cobb-Douglas production function with a Harrodneutral technical progress and constant returns to scale, capital and labor receive their marginal products, etc. We show that a unique long-run equilibrium exists and is characterized by the socalled natural rate of growth. The necessary and sufficient conditions of global asymptotic stability form a system of three non-trivial inequalities. We argue that in modern economies, these conditions are satisfied, except perhaps for very short periods of time. Furthermore, we show that the golden rules of fiscal policy have the form of an alternative optimal policy that crucially depends on the relation between the real interest rate and the natural rate of growth and on the relations between five other autonomous parameters.

Fiscal policy within a common currency area – growth implications in the light of neoclassical theory

Abstract: We examine the long-run impact of fiscal policy on economic growth under the conditions of an economic and monetary union (EMU). The analysis is based on the neoclassical growth model of a small (in economic terms) open economy in an EMU. The core assumptions are perfect capital mobility, which results in identical interest rates across the EMU, and perfect mobility of goods, which leads to the convergence of price levels. The model is based on standard neoclassical assumptions, i.e., the output is determined by the Cobb-Douglas production function with a Harrodneutral technical progress and constant returns to scale, capital and labor receive their marginal products, etc. We show that a unique long-run equilibrium exists and is characterized by the socalled natural rate of growth. The necessary and sufficient conditions of global asymptotic stability form a system of three non-trivial inequalities. We argue that in modern economies, these conditions are satisfied, except perhaps for very short periods of time. Furthermore, we show that the golden rules of fiscal policy have the form of an alternative optimal policy that crucially depends on the relation between the real interest rate and the natural rate of growth and on the relations between five other autonomous parameters.

Economic growth, human capital investment, and health expenditure : a study of OECD countries

Abstract: Studies have shown that increase in health care expenditure is related to the income level and economic growth of a country. But a theoretically optimal level of health expense and an optimal growth rate are rarely investigated. This paper assumes that health expenditure is a gross investment in human capital and follows the usual characteristics of investment in the Solow growth model. Based on Solow, a theoretical model is developed to discuss the role of health capital in economic growth. The model shows that convergence is present between poorer and wealthier countries when both physical and health capitals are considered. In the empirical analyses, this paper first estimates the optimal steady state product level based on the method of Mankiw, Romer and Weil (1992). Secondly, the optimal steady state health expenditure amounts are projected assuming that the steady state situation automatically achieves the Golden Rule consumption maximization result driven by the free market force. The results show that most of the studied 15 OECD countries have excessive health expenditure for approximately the past two decades. Some of the countries show a decreasing pattern of overspending and finally reach the optimal level. But a few of them do not show a format of cost containment for controlling health expenditure.

Mandatory Balanced Budget in Dutch Legislation Following Examples Abroad

Abstract: On 2 March 2012, 25 EU Member States (excluding the United Kingdom and the Czech Republic, for the time being) signed what is known as the Fiscal Compact. The objective of this treaty is to tighten budgetary discipline within the European Union. This is achieved mainly through the introduction of a ‘balanced budget rule’ – the obligation to maintain balance in national budgets. This balanced budget rule should be incorporated into national law, preferably constitutional, within one year of the treaty coming into force. This rule introduces actual – substantive – conditions for national budgets. What can be expected as a result of incorporating this balanced budget rule – also known as the golden rule – in Dutch (constitutional) law? In order to review the effectiveness of a golden rule in Dutch legislation in this paper we will also take a look beyond our borders, especially to the United States and Germany. Experiences in the United States and Germany show that the value of statutory and constitutional measures in controlling the national economy should not be overestimated. The Dutch golden rule will be assessed in the light of the experiences from Germany and the United States – what general lessons can we learn from the examples in the United Stated and Germany? And – where possible – certain proposals will be made to ensure that the Dutch golden rule is as effective as possible in light of the Dutch constitutional system.

Optimal education and pensions in an endogenous growth model

Abstract: In OLG economies with life-cycle saving and exogenous growth, competitive equilibria in general fail to achieve optimality because individuals accumulate amounts of physical capital that differ from the one that maximizes welfare along a balanced growth path (the Golden Rule). With human capital, a second potential source of departure from optimality arises, related to education decisions. We propose to recover the Golden Rule of physical and also human capital accumu- lation. We characterize the optimal policy to decentralize the Golden Rule balanced growth path when there are no constraints for individuals to finance their education investments, and show that it involves education taxes. Also, when the government subsidizes the repayment of education loans, optimal pensions are positive

United States and German Real Capital Formation and Social Investment in the Sciences and Humanities

Abstract: Two rules for optimizing economic growth are applied to the United States and Germany. One application is to test both against the Golden Rule of Capital Accumulation, and the other is to measure social investment in the sciences and humanities against Euler’s equation.

Modeling the Growth of the World Economy: The Basic Overlapping Generations Model

Abstract: This chapter is devoted to a simple modeling of the growth of the world economy. To this end a log-linear, CD version of Diamond’s (American Economic Review, 55, 1126–1150, 1965) neoclassical growth model is used as basic overlapping generations (OLG) growth model. This is then extended across several further dimensions in the following chapters. As a simple but complete intertemporal general equilibrium model it comprises the optimization problems of agents (younger and older households as well as firms) and the market clearing conditions for each model period. The fundamental equation of motion of the efficiency-weighted capital intensity is derived from the first-order conditions for household’s utility and firm’s profit maximization and from labor and capital market clearing conditions. The “golden rule” of capital accumulation ensures that consumption per efficiency capita is maximized over the long run.

Golden Rule, Non-distortional Tax and Governmental Transfer

Abstract: We consider the combination of non-distortional taxes (subsidies), a consumption tax and a wage income tax, in an overlapping-generations model to investigate how the rates of these taxes should be set to achieve a golden rule level of capital stock. We prove that if the initial steady state level of capital is below (above) the golden rule, the wage income tax rate should be negative (positive) and the consumption tax rate should be positive (negative) both at the steady state and along with the transitional path to the new steady state. We then show that, in transition, individuals can obtain benefit (loss) of a positive (negative) net transfer from (to) the government. In proving, a capital market equilibrium condition is necessary.

Franco-German co-operation: productive tension

Abstract: Since the start of the Eurozone crisis in 2010, the German and French governments have been in constant conflict when it has come to finding a political response. There have been many bones of contention: financial support for Greece, pooling of debt, the role of the ECB, the introduction of economic governance, criticism of the German export model, sanctions against lax countries, the fiscal pact and the introduction of a golden rule, to name just some. These disputes were amplified by the media and public debate, which both added their sometimes excessive share of polemic1. However, in the face of an unprecedented crisis, both governments have succeeded in overcoming their disagreements, reaching a necessary consensus. Does the usefulness of Franco-German cooperation lie in the intelligent management of these differences, which alone will lead to a convergence in their national positions and European progress?