Golden Rule (fiscal policy)

About: Golden Rule (fiscal policy) is a research topic. Over the lifetime, 661 publications have been published within this topic receiving 9789 citations.

Bequests, Golden-age Capital Accumulation and Government Debt

Abstract: The purpose of this paper is to examine the golden ages of an infinite time horizon economy in which individual families have finite life-spans but are connected with other generations through bequests. We construct a model of family bequest behaviour based on utility maximization and combine it with a simple, aggregative description of production. We then show that the overall model always has at least one steady-state equilibrium. Although we do not argue that bequest-motivated saving must necessarily play a major role in total capital accumulation, we do derive the following result: bequests will become an overwhelmingly important source of capital in situations in which the steady-state interest rate approaches a level P 1 derived in our analysis. Thus, at minimum, bequest behaviour has a safety value role, preventing a steady-state interest rate too much above the golden rule level and, hence, putting a lower bound on potential steady-state capital-to-labour ratios. We also present a second, somewhat different, application of our steady-state model: we show that the government can always change the steady-state interest rate with a properly designed shift between tax and debt financing of its spending. This result conflicts with the argument that government debt is not a component of private aggregate net worth since the discounted value of future debt service should exactly counterbalance the value now of any new government bonds issued. The organization of this paper is as follows. The first section sets up our bequest model for families. The second establishes the existence of at least one steady state and derives a lower bound for the aggregate capital-to-labour ratio. The third discusses government debt. All proofs for the propositions of this paper are in a separate appendix at the end.

Is there a Golden Rule for the Stochastic Solow Growth Model

Abstract: This paper analyzes the dependence of average consumption on the saving rate in a one-sector neoclassical Solow growth model with production shocks and stochastic rates of population growth and depreciation where arbitrary ergodic processes are considered. The long-run behavior of the stochastic capital intensity and hence average consumption is uniquely determined by a random fixed point which depends continuously on the saving rate. We prove existence of a golden rule saving rate maximizing average consumption per capita. A dynamic inefficiency result is given to ascertain the importance of the golden rule for the stochastic Solow model. The cases of Cobb-Douglas and CES production function are analyzed numerically, revealing that shocks to either parameter can lead to higher average consumption at the golden rule saving rate.

The Evolution of the Golden Rule

Abstract: Humans and other primates have a keen sense of fairness and a tendency to cooperate, even when it does them no discernible good.

Borrowing to Finance Public Investment? The ‘Golden Rule of Public Finance’ Reconsidered in an Endogenous Growth Setting*

Abstract: In this paper, we look for long-run and short-run effects of fiscal deficits on economic growth and welfare in a standard endogenous growth model. We show that, under very general hypotheses, the ‘golden rule of public finance’, which allows a government to run public-investment-oriented fiscal deficits, leads to a lower balanced-growth path in the long run, and eventually in the short run, compared with balanced-budget rules. Welfare effects are more difficult to assess, and depend on the form of the utility function. Our model shows that debt rules such as the golden rule may improve (if the consumption elasticity of substitution is ‘low’) or weaken (if the consumption elasticity of substitution is ‘high’) intertemporal welfare. Consequently, a balanced-budget rule does not necessarily dominate debt rules from the point of view of welfare, while it does from the point of view of long-run economic growth.

Politics and Efficiency of Separating Capital and Ordinary Government Budgets

Abstract: We analyze a "golden rule" that separates capital and ordinary account budgets and allows a government to finance only capital items with debt. Many national governments followed this rule in the eighteenth and nineteenth centuries, and most U. S. states do today. We study an overlapping-generations economy where majorities choose durable and nondurable public goods in each period. When demographics imply even moderate departures from Ricardian equivalence, the golden rule substantially improves efficiency. Examples calibrated to U. S. demographics show greater improvements at the state level or with nineteenth century demographics than under current national demographics.