The Effect of Fiscal Rules on Public Investment If Budget Deficits are Politically Motivated

Working Paper No. TI97-125/1

20 Pages Posted: 23 Jan 2004

See all articles by Robert Dur

Robert Dur

Erasmus University Rotterdam (EUR) - Department of Economics; Tinbergen Institute; CESifo (Center for Economic Studies and Ifo Institute); IZA Institute of Labor Economics

Ben D. Peletier

affiliation not provided to SSRN

Otto H. Swank

Erasmus University Rotterdam - Department of Economics; Tinbergen Institute Rotterdam (TIR)

Date Written: 2004

Abstract

Uncertainty about the future preferences of the government may induce policy makers to run excessive budget deficits. As a solution to this problem, economists have proposed to impose a binding debt rule. In this paper we argue that a binding debt rule does not eliminate the distortions due to strategic behaviour of politicians. Rather, strategic manipulation shifts from public debt to public investment. As an alternative, we examine the effects of a capital borrowing rule which permits the government to run a budget deficit equal to the amount of public investment. We show that this rule effectively eliminates strategic behaviour.

Keywords: fiscal rules; budget deficits; public investment

JEL Classification: D72, E62, H61, H62

Suggested Citation

Dur, Robert and Peletier, Ben D. and Swank, Otto H., The Effect of Fiscal Rules on Public Investment If Budget Deficits are Politically Motivated (2004). Working Paper No. TI97-125/1, Available at SSRN: https://ssrn.com/abstract=93812 or http://dx.doi.org/10.2139/ssrn.93812

Robert Dur (Contact Author)

Erasmus University Rotterdam (EUR) - Department of Economics ( email )

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Rotterdam, 3000 DR
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HOME PAGE: http://people.few.eur.nl/dur

Tinbergen Institute

Amsterdam/Rotterdam
Netherlands

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

Ben D. Peletier

affiliation not provided to SSRN

Otto H. Swank

Erasmus University Rotterdam - Department of Economics ( email )

P.O. Box 1738
3000 DR Rotterdam
Netherlands

Tinbergen Institute Rotterdam (TIR)

P.O. Box 1738
3000 DR Rotterdam
Netherlands
+31 10 4081448 (Phone)
+31 10 2120551 (Fax)

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