Borrowing to Finance Public Investment? The "Golden Rule of Public Finance" Reconsidered in an Andogenous Growth Setting" - Archive ouverte HAL Access content directly
Journal Articles Fiscal Studies Year : 2009

Borrowing to Finance Public Investment? The "Golden Rule of Public Finance" Reconsidered in an Andogenous Growth Setting"

Patrick Villieu

Abstract

In this paper, we look for long-run and short-run effects of fiscal deficits on economic growth and welfare in a standard endogenous growth model. We show that, under very general hypotheses, the 'golden rule of public finance', which allows a government to run public-investment-oriented fiscal deficits, leads to a lower balanced-growth path in the long run, and eventually in the short run, compared with balanced-budget rules. Welfare effects are more difficult to assess, and depend on the form of the utility function. Our model shows that debt rules such as the golden rule may improve (if the consumption elasticity of substitution is 'low') or weaken (if the consumption elasticity of substitution is 'high') intertemporal welfare. Consequently, a balanced-budget rule does not necessarily dominate debt rules from the point of view of welfare, while it does from the point of view of long-run economic growth.
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Dates and versions

hal-00387502 , version 1 (25-05-2009)

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  • HAL Id : hal-00387502 , version 1

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Alexandru Minea, Patrick Villieu. Borrowing to Finance Public Investment? The "Golden Rule of Public Finance" Reconsidered in an Andogenous Growth Setting". Fiscal Studies, 2009, 30 (1), pp.103-133. ⟨hal-00387502⟩
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