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Public investment, the Stability Pact and the ‘golden rule’

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Author Info
Fabrizio Balassone
Daniele Franco

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Abstract

The fiscal rules set in the Treaty of Maastricht and in the Stability and Growth Pact have sometimes been criticised as an excessively binding constraint for appropriate counter-cyclical action. The risk that the rules may permanently reduce the public sector’s contribution to capital accumulation has also been pointed out. In this framework, the adoption of a ‘golden rule’ has been suggested. Starting from the recent debate, this paper tackles two questions: (a) the implications of the Pact for public investment and (b) the pros and cons of introducing a golden rule in EMU’s fiscal framework, given the objectives of low public debts and adequate margins for a stabilising budgetary policy. The analysis suggests that the rules set in the Treaty and in the Pact may negatively influence public investment spending. However, the golden rule, although intuitively appealing, does not seem to be an appropriate solution to the problem.

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Article provided by Institute for Fiscal Studies in its journal Fiscal Studies.

Volume (Year): 21 (2000)
Issue (Month): 2 (June)
Pages: 207-229
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Handle: RePEc:ifs:fistud:v:21:y:2000:i:2:p:207-229

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Find related papers by JEL classification:
H54 - Public Economics - - National Government Expenditures and Related Policies - - - Infrastructures
H6 - Public Economics - - National Budget, Deficit, and Debt
E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination

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    Other versions:
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Leopold Diebalek & Walpurga Koehler-Toeglhofer & Doris Prammer, 2006. "Reform of the Stability and Growth Pact," Monetary Policy & the Economy, Oesterreichische Nationalbank (Austrian Central Bank), issue 1, pages 78-109, May 2006. [Downloadable!]
  2. Suescun, Rodrigo, 2005. "Fiscal space for investment in infrastructure in Colombia," Policy Research Working Paper Series 3629, The World Bank. [Downloadable!]
  3. Coe, P. & Vahey S.P. & Wakerly, E.C., 2000. "The Transparency and Accountability of UK Debt Management: A Proposal," Cambridge Working Papers in Economics 0028, Faculty of Economics, University of Cambridge. [Downloadable!]
  4. Marco Bassetto & Vadym Lepetyuk, 2007. "Government Investment and the European Stability and Growth Pact," NBER Working Papers 13200, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  5. Fermín Cabasés & Pedro Pascual & Jaime Vallés, 2007. "The effectiveness of institutional borrowing restrictions: Empirical evidence from Spanish municipalities," Public Choice, Springer, vol. 131(3), pages 293-313, June. [Downloadable!] (restricted)
  6. Jerome Creel, 2003. "Ranking Fiscal Policy Rules: the Golden Rule of Public Finance vs. the Stability and Growth Pact," Documents de Travail de l'OFCE 2003-04, Observatoire Francais des Conjonctures Economiques (OFCE). [Downloadable!]
  7. C. Bianchi & M. Menegatti, 2007. "Rules versus discretion in fiscal policy," Economics Department Working Papers 2007-EP05, Department of Economics, Parma University (Italy). [Downloadable!]
  8. Tilman Brück & Rudolf Zwiener, 2004. "Fiscal Policy Rules for Stabilisation and Growth: A Simulation Analysis of Deficit and Expenditure Targets in a Monetary Union," Discussion Papers of DIW Berlin 427, DIW Berlin, German Institute for Economic Research. [Downloadable!]
    Other versions:
  9. Cronin, David & Daniel McCoy,, 2000. "Fiscal Sustainability When Time is on Your Side," Research Technical Papers 4/RT/00, Central Bank & Financial Services Authority of Ireland (CBFSAI). [Downloadable!]
  10. Pedro Gomes & Francois Pouget, 2008. "Corporate Tax Competition and the Decline of Public Investment," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
    Other versions:
  11. Friedrich Heinemann, 2006. "Factor mobility, government debt and the decline in public investment," International Economics and Economic Policy, Springer, vol. 3(1), pages 11-26, April. [Downloadable!] (restricted)
    Other versions:
  12. Mintz, Jack M. & Smart, Michael, 2006. "Incentives for public investment under fiscal rules," Policy Research Working Paper Series 3860, The World Bank. [Downloadable!]
  13. Tilman Brück & Andreas Cors & Klaus F. Zimmermann & Rudolf Zwiener, 2002. "Stability Criteria and Convergence: The Role of the System of National Accounts for Fiscal Policy in Europe," Discussion Papers of DIW Berlin 318, DIW Berlin, German Institute for Economic Research. [Downloadable!]
  14. Ismihan, Mustafa & Ozkan, F Gulcin, 2007. "Public investment: a remedy or a curse? Examining the Role of Public Investment for Macroeconomic Performance," CEPR Discussion Papers 6139, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  15. Mauro Visaggio, 2004. "Does Stability and Growth Pact Provide an Adequate and Consistent Fiscal Rule?," Macroeconomics 0407008, EconWPA. [Downloadable!]
  16. Jerome Creel & Paola Monperrus-Veroni & Francesco Saraceno, 2007. "Has the Golden Rule of Public Finance Made a Difference in the UK ?," Documents de Travail de l'OFCE 2007-13, Observatoire Francais des Conjonctures Economiques (OFCE). [Downloadable!]
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