A golden rule of public finance or a fixed deficit regime? Growth and welfare effects of budget rules

Max Groneck*

*Corresponding author for this work

Research output: Contribution to journalArticleAcademicpeer-review

16 Citations (Scopus)

Abstract

In this paper, we compare growth and welfare effects of various budget rules within an endogenous growth model with productive public capital, utility enhancing public consumption and public debt. We find that introducing a fixed deficit regime does not affect the long run growth rate compared to a balanced budget while establishing a golden rule results in higher growth. Simulations of welfare effects indicate that a golden rule leads to highest welfare followed by a balanced budget and a fixed deficit regime. A maximum fraction of deficit financed public investment is derived. Varying the intertemporal elasticity of substitution shows that economies populated by households who have a strong tendency to smooth consumption should adhere to a balanced budget from a welfare point of view. (C) 2009 Elsevier B.V. All rights reserved.

Original languageEnglish
Pages (from-to)523-534
Number of pages12
JournalEconomic Modelling
Volume27
Issue number2
DOIs
Publication statusPublished - Mar-2010
Externally publishedYes

Keywords

  • Budget rules
  • Golden rule of public finance
  • Fiscal policy
  • Endogenous growth
  • Welfare
  • ENDOGENOUS GROWTH
  • FISCAL-POLICY
  • TRANSITIONAL DYNAMICS
  • government debt

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