A Golden Rule of Public Finance or a Fixed Deficit Regime? Growth and Welfare Effects of Budget Rules

FiFo - CPE Discussion Paper No. 08-7

32 Pages Posted: 9 Nov 2008 Last revised: 7 Dec 2011

See all articles by Max Groneck

Max Groneck

Stockholm School of Economics, Department of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: November 6, 2008

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 a fixed deficit regime does not affect the long run growth rate compared to a balanced budget while the growth rate is increased by a golden rule. Welfare effects are ambiguous. Simulations indicate that economies populated by households who have a strong tendency to smooth consumption should adhere to a balanced budget rather than a golden rule or a fixed deficit rule from a welfare point of view.

Keywords: budet rules, golden rule of public finance, fiscal policy, endogenous growth, welfare

JEL Classification: E62, H50, H62, H63, O40

Suggested Citation

Groneck, Max, A Golden Rule of Public Finance or a Fixed Deficit Regime? Growth and Welfare Effects of Budget Rules (November 6, 2008). FiFo - CPE Discussion Paper No. 08-7, Available at SSRN: https://ssrn.com/abstract=1296734 or http://dx.doi.org/10.2139/ssrn.1296734

Max Groneck (Contact Author)

Stockholm School of Economics, Department of Economics ( email )

Germany

HOME PAGE: http://https://www.hhs.se/en/Research/Departments/DE/

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