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The Golden Rule and the Economic Cycles

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  • Ms. Keiko Honjo

Abstract

The present formulation of the golden rule in the United Kingdom allows fiscal performance to be tested explicitly on an ex-post basis. However, it requires precise dating of the economic cycle, which can lead to significant controversy. Also, the need to aim for current balance or better "over the cycle" may force fiscal policy to be procyclical toward the end of cycles. Using dynamic stochastic simulations, the paper suggests that making the formulation of the golden rule forward-looking and independent of the dating of the economic cycle would reduce the risk of procyclicality and enhance macroeconomic stability.

Suggested Citation

  • Ms. Keiko Honjo, 2007. "The Golden Rule and the Economic Cycles," IMF Working Papers 2007/199, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:2007/199
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    References listed on IDEAS

    as
    1. Mr. Douglas Laxton & Mr. Andrew Berg & Mr. Philippe D Karam, 2006. "Practical Model-Based Monetary Policy Analysis: A How-To Guide," IMF Working Papers 2006/081, International Monetary Fund.
    2. Artis, Michael, 2002. "Dating the Business Cycle in Britain," National Institute Economic Review, National Institute of Economic and Social Research, vol. 182, pages 90-95, October.
    3. Ms. Keiko Honjo & Mr. Benjamin L Hunt, 2006. "Stabilizing Inflation in Iceland," IMF Working Papers 2006/262, International Monetary Fund.
    4. Mr. Michael Kell, 2001. "An Assessment of Fiscal Rules in the United Kingdom," IMF Working Papers 2001/091, International Monetary Fund.
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    Cited by:

    1. Combes, Jean-Louis & Minea, Alexandru & Sow, Moussé, 2017. "Is fiscal policy always counter- (pro-) cyclical? The role of public debt and fiscal rules," Economic Modelling, Elsevier, vol. 65(C), pages 138-146.
    2. Ion-Lucian CATRINA, 2012. "Governing European Union To Financial Stability," Scientific Bulletin - Economic Sciences, University of Pitesti, vol. 11(1), pages 35-42.
    3. Alvaro Angeriz & Philip Arestis, 2009. "The consensus view on interest rates and fiscal policy: reality or innocent fraud?," Journal of Post Keynesian Economics, Taylor & Francis Journals, vol. 31(4), pages 567-586, July.

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