From Deficit Delusion to the Fiscal Balance Rule: Looking for an Economically Meaningful Way to Assess Fiscal Policy

26 Pages Posted: 15 Feb 2006

See all articles by Laurence J. Kotlikoff

Laurence J. Kotlikoff

Boston University - Department of Economics; National Bureau of Economic Research (NBER); Gaidar Institute for Economic Policy

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Date Written: June 7, 1989

Abstract

Although the deficit is a useful construct for Keynesian analyses of fiscal policy, the deficit appears to be a less useful measure of fiscal policy within all but a restricted class of intertemporal neoclassical models. This paper suggests that the nature of deficits in a simple certainty model with nondistortionary policies, and the in settings with uncertain policy, distortionary policy, and liquidity constraints is, to a large extent, arbitrary. It then posits a more appropriate description of fiscal policy for the class of models in question, and proposes the economically meaningful "fiscal balance rule" as an alternative to the economically arbitrary "balanced budget rule" as a means of assessing whether fiscal policy is intergenerationally tight or loose.

JEL Classification: 023, 320

Suggested Citation

Kotlikoff, Laurence J., From Deficit Delusion to the Fiscal Balance Rule: Looking for an Economically Meaningful Way to Assess Fiscal Policy (June 7, 1989). IMF Working Paper No. 89/50, Available at SSRN: https://ssrn.com/abstract=884819

Laurence J. Kotlikoff (Contact Author)

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