Has the Golden Rule of Public Finance Made a Difference in the UK?
30 Pages Posted: 22 Jun 2007
Date Written: May 2007
Abstract
This paper uses the SVAR methodology to investigate the effects of public investment on growth, and more specifically, the effects of the introduction of a golden rule of public finance. We extend the existing literature by estimating a model of the British economy that takes into account long run factors such as public debt accumulation. We find that in such a long run framework, public investment has a significant and permanently positive effect on GDP growth; this result runs counter to the most recent literature on the topic that was limited to a short run specification. We further find, by comparing different subsamples, that the introduction of the golden rule in 1997 strengthened the positive effect of public investment.
Keywords: fiscal policy, golden rule of public finance, Structural VAR, Public Investment, UK Economy
JEL Classification: C32, E60, E63, H60
Suggested Citation: Suggested Citation
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