Showing papers on "Golden Rule (fiscal policy) published in 2016"

On Barro's Theorem of Debt Neutrality: The Irrelevance of Net Wealth

Abstract: The effects of national debt on real economic activity has been a recurring topic in the literature on macroeconomic policy analysis since the time of Adam Smith. The problem is usually stated as follows: for a given level of government spending, is the economy sensitive to the financing mix between tax and debt? Historically, attention has focused on the question of whether or not individuals perceive government bonds as net wealth, the link between wealth and real activity being taken as given. The main point of debate is well established. The issue of bonds raises private assets by the full value of the bonds. The corresponding tax liabilities for interest payments and retirement of the debt extend indefinitely into the future. The perception of bonds as net wealth would then appear to depend on the length of the individual's optimization horizon. The most recent contribution to this debate was made by Robert Barro (1974) in which he argued that, despite the limitation of finite lives, bonds will not be regarded as net wealth in a system characterized by operative intergenerational transfers. The essence of his argument is that inclusion of a bequest motive effectively converts a finite horizon into an infinite one. In that paper, Barro acknowledged a potential limitation on his proof of the neutrality result; it was only valid for bonds that are redeemed at a known point in the future. This limitation was raised again in a subsequent exchange with Martin Feldstein in which Barro (1976) agreed that for a growing economy, an increase in steady-state per capita debt will generate net wealth if the rate of growth is greater than the interest rate.' However, he argued that such a steadystate growth situation would not be consistent with rational utility-maximizing behavior. The main theme of this paper is that the literature has focused attention on the wrong question. The real effects of national debt are independent of whether or not individuals perceive the debt as net wealth. The correct question is whether or not changes in the level of debt force individuals into patterns of intertemporal consumption that they are unable to neutralize by adjustments in their portfolio behavior. Viewing neutrality in this light leads to some reinterpretation of the conditions under which neutrality is likely to hold. My analysis starts where Barro and Feldstein leave off. Within the framework of the overlapping-generations model with gift and bequest motives, I show that steady-state equilibrium growth is consistent with a growth rate in excess of the interest rate indeed, without specific knowledge of the parameters of the economy, there are no a priori grounds on which to expect any particular relationship between the growth and interest rates. More importantly, so long as it is valid to view the aggregate economy as behaving like a composite individual, changes in the steady-state level of government debt are neutral regardless of which relationship prevails, provided one or the other of the intergenerational transfer motives is operative. I will refer to this as the extended neutrality theorem. Section I presents an analysis of steadystate growth with gift and bequest behavior. The steady-state growth path is shown to lie above the Golden Rule solution if the gift

Municipality Budget Rules and Debt: Is the Italian Regulation Effective?

Abstract: In this paper we investigate the Italian regulation on local government budget related to the European fiscal rules (the so-called Domestic Stability Pact), the Constitutional golden rule, and the pre-existing ceilings on new borrowing, with the intent to study the overall effect on local debt and investment expenditure. Our focus is on the municipality level of government. We use a dataset encompassing the main budget items of virtually all municipalities for the period 1999-2009 to perform panel estimation of the efficacy of local fiscal rules in terms of debt reduction and to detect possible unintended effects on investment spending. Empirical evidence supports the conclusion that the Italian system suffers from a lack of coordination between budget constraints and borrowing limits. Our main conclusion is that the decentralization process in Italy has not found an adequate solution yet: on the one hand, local administrations are not equipped to deal with the increased financial responsibility and the progressive sophistication of financial markets; on the other hand, central government has been inconsistent in devolving fiscal powers to municipalities while at the same time adopting multi-layered regulations to restrain local fiscal autonomy in order to pursue the overall public finance control.

How Well Do Subnational Borrowing Regulations Work

Abstract: There are many positive things associated with subnational borrowing, including additional funding or promoting intergenerational equity. But it may also endanger fiscal sustainability and macro stability due to moral hazard and soft budget constraints. Thus borrowing controls are justified and also common. In this paper we review the different types of ex-ante and ex-post regulations used the international experience based on a large panel of developed and developing countries. Effectiveness or borrowing regulations in this paper is defined relative to the ability to preserve primary balances at the general government and subnational levels. There is a wide variety of both ex-ante and ex-post sub-national borrowing regulations that countries implement. Each has both advantages and disadvantages, with different suitability countries’ circumstances. For example, depth of financial markets is important when choosing market-based regulations. The presence of subnational tax autonomy contributes to an increase in the general government primary balance, but not significantly for subnational primary balances. A history of subnational bailouts is associated with lower primary balances on average at all levels. The “golden rule” (borrowing is only for capital investment purposes) and limits on debt and borrowing appear effective at all levels of government. However, we find that none of the broad types of sub-national borrowing regulations seem to have a distinct significant direct effect on the narrow definition of fiscal sustainability at the subnational level.

Golden Rule The Investment Theory Of Party Competition And The Logic Of Money Driven Political Systems

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Reviving fiscal policy in Europe: towards an implementation of the golden rule of public investment*

Abstract: The implementation of a golden rule of public investment as a necessary institutional reform and an important step aimed at overcoming the constraints imposed by the new European Economic Governance are proposed. The rule is widely accepted in traditional public finance and can deliver both intergenerational fairness as well as more growth and employment. The golden rule would exempt public (net) investment suitably defined from the relevant deficit targets of both the preventative and the corrective arms of the Stability and Growth Pact as well as the Fiscal Compact. That way, fiscal policy would be upgraded and would receive more room for manoeuvre and public investment as a particularly growth-enhancing public expenditure category would be strengthened. Different definitions are discussed and a pragmatic definition based on the national accounts with some modifications will be proposed. The standard reservations against a golden rule are critically assessed and mostly discarded. Although a proper implementation would need some time, this should not be an excuse for not using pragmatic short-term solutions that are readily available at the European level.

Working Paper 01-16 - Improving the Stability and Growth Pact by integrating a proper accounting of public investments: a new attempt

Abstract: Improving the functioning of the Stability and Growth Pact (SGP) is back on the agenda, especially as the decline in public investment resulting from fiscal adjustment processes implemented according to the current Pact rules is seen as a brake on future economic growth. When discussions about a Pact revision in 2005 were under way, several major authors (for instance: Blanchard and Giavazzi in CEPR February 2004) suggested reverting to a golden rule under which the deficit would exclude investment expenditure, net of amortization. The Pact was revised in 2005 but this proposal was not adopted. This paper presents a new attempt to integrate a proper accounting of investment into the Pact by modifying the formula of the MTO (Medium Term Objective for the budget balance), without losing the other dimensions of the present formula: the partial provisioning of the so-called cost of ageing and the accelerated debt reduction for highly indebted countries. In this way, the public investment programme becomes a centrepiece of the structural policy of a government and not the first instrument of a cyclical policy.

The Golden Rule with Endogenous Labor Participation Rate

Abstract: The Golden Rule of accumulation in an economy with an endogenously determined growth rate of labor has been examined by Eric Davis. Davis finds that if the growth rate is an increasing function of per capita net income, steady-state per capita consumption is maximized not at the equality of the propensity to save and capital's share of output, but at a propensity to save smaller than capital's share of output and an interest rate which exceeds rather than equals the growth rate. The supply of labor in an economy is affected by both the growth and participation rates of its population. Davis' results and the traditional Golden Rule depend upon the implicit assumption that the latter rate is constant. Davis calls for a more flexible treatment of the participation rate, allowing the possibility of optimal unemployment in a theory of optimal savings. This note examines a simple model with a varying participation rate. It is seen that one common assumption describing the participation rate leads to a recommendation opposite that of Davis.

Whether the Golden Rule Is in Aristotle’s Ethics

Abstract: Although Aristotle did not use the formula of the Golden Rule in his texts, in his intellectual constructions he often presented interpretations of the virtuous character and virtuous relationships that are clearly related to the Golden Rule. Furthermore, Aristotle’s considerations of shame, social interaction, and friendship show that his ethics is saturated with the content and spirit of the Golden Rule.

Decision Making in Flexible Transport: The Importance and Application of the ‘Golden Rule’

Abstract: Purpose This chapter demonstrates how the ‘golden rule’ can be applied by operators of flexible transport services to improve investment and pricing decisions. Design/methodology/approach The chapter explains why an appropriate decision making framework is particularly important for operators of flexible transport services and compares the traditional economic framework of fixed versus variable costs to the decision-oriented approach that analyses the activities of a firm in terms of costs that are avoidable (i.e. specific to a particular activity) and costs that are shared amongst a number of activities. The chapter introduces the ‘golden rule’ of decision making and discusses issues in implementing the rule. Findings An economic framework for decision making is particularly important for smaller scale transport operations (such as flexible transport services) because ‘lumpy’ investment costs are more significant than for larger operators. The traditional economic approach divides costs into fixed costs and those which vary by patronage. A better framework for decision making divides costs into those which are specific to a particular activity and, therefore, avoidable if that activity ceases, and those costs which are common to more than one activity. Practical implications Using this framework allows operators to apply the ‘golden rule’ in pricing their services so that the avoidable costs of each activity are recovered and the enterprise covers its shared costs overall. Originality/value This chapter will be useful to operators of flexible transport services who are new to the industry or are reacting to changes in the funding environment.

French sub-national public finances: on the difficulty of being a decentralized unitary state

Abstract: France has one of the highest reported ratios of general government’s public spending to GDP, a high public sector deficit and a rapidly increasing national debt. France has also followed a systematic policy of decentralization for the past 30 years, the first law for decentralization dating back to 1982. This paper looks into a potential link of causality between those two observations, focusing more specifically on the impact of the recent crisis on the budgets of the various layers of governments. Following an overview of French territorial organization and the main steps of the decentralization process, data are presented on the evolution of public finances at all levels of government in the long run and during the years of crisis until now. It appears that, although local governments are closely monitored and controlled by the central government and various fiscal rules limit their freedom, the present state of decentralization is far from satisfactory and repeated attempts to fix problems have generated legal insecurity as well as a dangerous game-play between local and state representatives. Unless greater coherence is brought to the decentralization mechanism and unless cooperation and confidence are restored between layers of government, the state of public finances will continue to deteriorate. A golden rule for central government’s fiscal policy could help establish the right direction.

Objects and Procedures of Budgetary Planning and Limits to Borrowing (“Debt Brake”) in the Federal Republic of Germany

Abstract: The introduction of the constitutional “debt brake” within the German Basic Law in 2009, ended a long-standing tradition that allowed state indebtedness as long as investments were made to the equivalent amount. As this old “golden rule of financial policy” had been misused for decades, a strong majority both in the Bundestag (the Parliament) and in the Bundesrat (the second chamber) voted in favor of a provision according to which “the budgets of the Federation and the Lander shall in principle be balanced without revenue from credits”. The analysis begins by clarifying that the Federation, the individual Lander and also the municipalities enjoy constitutionally guaranteed budgetary autonomy. Next, an overview of the objects and procedures of budgetary planning follows, which includes an explanation of the formal requirements for incurring debt. After that, the author analyzes in detail the limits to borrowing. There are three exceptions to the principle that indebtedness is prohibited. First, the Federation – unlike the States – is afforded a “structural” indebtedness when revenue obtained from borrowing does not exceed 0.35 % of the nominal GDP. Second, under “abnormal” economic conditions, both the Federation and the Lander may finance fiscal stimulus through the financial market (but have to reduce indebtedness or create surpluses in cyclical upturns). Third, the Basic Law permits the Federation and the States to borrow in case of “natural catastrophes” and “other unusual emergency situations”. These rules do not apply to the municipalities. Separate law restricts their borrowing. Finally, the author discusses the shortcomings of the new “debt brakes” and the risk that the restrictive regulations will be circumvented in practice.

The European Fund for Strategic Investments as a response to the EU's disinvestment crisis: an assessment of the Juncker Investment Plan

Abstract: The Juncker Investment Plan is the response to the EU disinvestment crisis. This paper is structured around three axes of the Plan: its political dimension, its financial aspect, and its investment aspect, and replies to the following questions: Will the Plan's efforts of crowding in private investments work in times of austerity? Is the Plan's democratic accountability sufficiently developed? Do we need sanctuarisation of resources from other EU programmes that will provide the Plan's initial funding basis? Can we count on an additionality effect of the Plan, or will we witness a crowding out effect of private capitals instead? Should there be a geographic allocation of investment funds? Should there be a social economy aspect in the Plan? How can we optimally combine the Plan with the fiscal strictures of the Stability and Growth Pact? This paper argues that the Juncker Investment Plan is a welcome but probably insufficient initiative.

Population aging and public pension: the case of beijing analyzed by an olg model

Abstract: This paper employs an overlapping-generations (OLG) model with altruistic motive and lifetime uncertainty to investigate the urban public pension system in China. Focusing on the case of Beijing, we examine the effects of the individual contribution rate, firm contribution rate, life expectancy and population growth rate on the capital-labor ratio, savings, per capita consumption and pension benefits. By controlling the firm contribution rate to adjust the capital-labor ratio of the market economy to the modified golden rule level, we find the optimal firm contribution rate. We also discuss the optimal firm contribution rate in Beijing under three cases: risen life expectancy, fallen population growth rate and the joint case of risen life expectancy and fallen population growth rate, and estimate the optimal firm contribution rate in 2020s. Integrating the established effects and the current economic goals, it is concluded that it will do more good than harm to strictly implement Beijing municipal population policy, improve the living and medical conditions, reduce the firm contribution rate, and raise the individual contribution rate.

The Golden Rule of Three.

Abstract: Think about the following three wordsVtriplicate, trifecta, and triad. Consider another threeVtrilogy, tertiary, and triumvirate. Have you ever reflected on the way that the number 3 dominates our thinking, actions, and writings (Newman, 2008)? The Pythagoreans believed that the number 3was the first true number. Thousands of years later, the creators of School House Rock proposed that ‘‘three is a magic number’’ (Dorough et al., 2002). We all learned in grade school that 3 is the first odd prime number. We give no thought to counting to three when a group of people wish to perform an action in synchrony. We often mutter unconsciously, ‘‘Third time’s the charm,’’ when we have been unsuccessful in previous endeavors or wish to offer encouragement to another who has experienced two previous failures (Bunch, 2000, p. 39). Throughout history and across professions, the number 3 has been used to engage, entertain, and educate. This rhetorical strategy is known as a tricolon. It is a series of three parallel words, phrases, or concepts that resonate with the listener by creating a rhythmicmessage (Forsyth, 2013, p. 97). This clustering concept is also known as the ‘‘rule of three’’ (Gallo, 2014, p. 191). One of the earliest uses of the rule of three has been attributed (although not substantiated) to St. Patrick of Ireland, in 432, when he used a shamrock to illustrate the concept of the Trinity to the people of Ireland. The rule of three is used in joke telling, speech writing, and storytelling. It is an important component of marketing, everyday language, and music (see Table 1). Dale Carnegie, the American writer and lecturer, is known for this speech giving directive, ‘‘Tell themwhat you are going to tell them, tell them, then tell them what you just told them’’ (Carnegie, 1936). Maria Montessori appreciated the significance of the number 3when she introduced her revolutionary pedagogy in 1907. Montessori believed that the first 5 years of life were sensitive periods in which children acquire vocabulary. She wanted children to have precise terminology for describing the world and, as a result, created the threeperiod lesson (Lillard, 2007, p. 179). The three-period lesson, a hallmark of Montessori education, includes three distinct activities: naming, recognizing, and remembering. The directress does not move to the third teaching activity until he or she is confident that the child will be successful. The underlying philosophy of the Montessori approach is mastery. As preceptors and professional development practitioners, our concern is that we facilitate mastery in our learners. How do we take complex skills, behaviors, and concepts and break them down into manageable ‘‘chunks’’? Harvard professor George Miller (1956) published a seminal article on the concept of chunking and, after robust analysis, suggested that the maximum amount of information an individual could store in his or her shortterm memory was actually 7j2. This is the rationale for the American telephone numbers consisting of seven digits excluding the area code. Given the explosion of research examining brain activity and resilience, more compelling evidence is needed to state that, empirically, there is a preferred ‘‘number’’ by the brain for easy information storage and retrieval. However, in our efforts to guide, engage, and support our learners, the novelty of three as a teaching technique cannot be overlooked. Our goal as preceptors and educators is to help our learners assimilate knowledge, skills, and attitudes into memorable patterns. Consider the handoff process when the oncoming nurse is attempting to prioritize the care using the information that is shared. The rule of three that can be used by the preceptor here is ‘‘How is the patient the same, better, or worse than yesterday?’’. What is the evidence that the nurse needs to know to answer that question? The rule of three can be used to delineate roles and responsibilities in a patient’s plan of care. A preceptor can pose this question: ‘‘Whenwe reflect on all the care needs of our patients and the three types of nursing interventions: dependent, independent, and interdependent, what are examples of interventions that you believe nursing owns for these patients?’’. The rule of three provides a ‘‘hook’’ for patients and their families, who are being bombarded with an overwhelming amount of information before discharge. The nurse can introduce patient education by offering ‘‘3 survival skills you can use to be safe at home.’’ The overarching survival skills aremanaging symptoms, taking medications correctly, and preventing complications. The specific topics for each skill Mary Beth Modic, DNP, RN, CDE, is ClinicalNurse Specialist, Cleveland Clinic, Ohio. E-mail: modicm@ccf.org.

Limitations on Government Debt and Deficits: The Netherlands

Abstract: Until recently there were no legal or constitutional limits on the Dutch government to incur deficits in its annual budget, nor on its ability to borrow money or incur debt. With the adoption of the Sustainable Public Finances Act (SPFA) in December 2013 the Netherlands established a novelty: for the first time two sets of (material) budgetary rules were codified in Dutch legislation. On the one hand the law codifies the trend-based budgetary policy and on the other hand the law codifies (a general reference to) the European golden rule and other European budgetary norms that apply to the Netherlands. This novelty has not in fact really changed the material budgetary landscape in the Netherlands: the SPFA codifies two sets of rules that were already adhered to during the preparation and execution of the budget. This is mainly due to the fact that there is already a strong sense of political commitment to budgetary and fiscal norms firmly rooted in the Netherlands.

The Golden Rule

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A Kaleckian Model of New Orders of Non-defense Capital Goods in the USA 1992–2010

Abstract: The paper follows Kalecki’s ‘golden rules’ under which historical materialism and econometrics can be reconciled provided that changes in the superstructure are not of such a magnitude as to invalidate the use of econometrics to estimate the relationships between the economic variables in the sector of productive activity and that productive relations are explicitly included in the model. Econometric estimates of the determinants of non-farm, non-financial capital goods in the USA 1992–2010 are presented. Statistically significant relationships are found between investment orders and cyclical variations in output, the interest rate spread, net cash flows, the net increase in financial liabilities, the net increase in financial assets, and the value of non-defense manufacturing shipments.