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.

Overcoming the Golden Rule: Sympathy and Empathy

Abstract: The Golden Rule enjoins us to treat others as we would like to be treated. But inherent in the Rule is an assumption of similarity: that others are like ourselves and therefore want to be treated s...

Optimal Taxation When Consumers Have Endogenous Benchmark Levels of Consumption

Abstract: I examine optimal taxes in an overlapping generations economy in which each consumer’s utility depends on consumption relative to a weighted average of consumption by others (the benchmark level of consumption) as well as on the level of the consumer’s own consumption. The socially optimal balanced growth path is characterized by the ModiÞed Golden Rule and by a condition on the intergenerational allocation of consumption in each period. A competitive economy can be induced to attain the social optimum by a lump-sum pay-as-you-go social security system and a tax on capital income.

Public Investment: Another (Different) Look

Abstract: Using a structural Vector Autoregression approach, this paper compares the macroeconomic effects of the three main government spending tools: government investment, consumption, and transfers to households, both in terms of the size and the speed of their effects on GDP and its components. Contrary to a common opinion, there is no evidence that government investment shocks are more effective than government consumption shocks in boosting GDP: this is true both in the short and, perhaps more surprisingly, in the long run. In fact, government investment appears to crowd out private investment, especially in dwelling and in machinery and equipment. There is no evidence that government investment "pays for itself" in the long run, as proponents of the "Golden Rule" implicitly or explicitly argue. The positive effects of government consumption itself are rather limited, and defense purchases have even smaller (or negative) effects on GDP and private investment. There is also no evidence that government transfers are more effective than government consumption in stimulating demand.

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