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Fiscal rules, public investment, and growth

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  • Serven, Luis

Abstract

Solvency is an intertemporal concept, relating to the present value of revenues and expenditures, and encompassing both assets and liabilities. But the standard practice among policy makers, financial market participants and international financial institutions is to assess the strength of the fiscal accounts solely on the basis of the cash deficit. Short-term cash flows matter, but a preponderant focus on them can encourage governments to invest too little, especially during episodes of fiscal tightening. This has potentially adverse consequences for growth and, paradoxically, even for fiscal solvency itself. The paper offers an overview of the links between fiscal targets, public investment, and public sector solvency. After reviewing the international experience with public investment under fiscal adjustment, the paper lays out an analytical framework to illustrate the consequences of using the public deficit as a guide to solvency. The paper then discusses some alternatives to conventional cash deficit rules and their implications for investment and fiscal solvency.

Suggested Citation

  • Serven, Luis, 2007. "Fiscal rules, public investment, and growth," Policy Research Working Paper Series 4382, The World Bank.
    • Handle: RePEc:wbk:wbrwps:4382
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    Citations

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    Cited by:

    1. Janeba, Eckhard & Todtenhaupt, Maximilian, 2018. "Fiscal competition and public debt," Journal of Public Economics, Elsevier, vol. 168(C), pages 47-61.
    2. Ales MELECKY & Martin MACHACEK, 2010. "The Role Of National And Supranational Fiscal Rules - International Evidence And Situation In The Czech Republic," Journal of Applied Economic Sciences, Spiru Haret University, Faculty of Financial Management and Accounting Craiova, vol. 5(4(14)/ Wi), pages 375-382.
    3. Straub, Stephane, 2008. "Infrastructure and growth in developing countries : recent advances and research challenges," Policy Research Working Paper Series 4460, The World Bank.
    4. Moreno-Dodson, Blanca, 2008. "Assessing the impact of public spending on growth - an empirical analysis for seven fast growing countries," Policy Research Working Paper Series 4663, The World Bank.
    5. Bom, Pedro R.D. & Ligthart, Jenny E., 2014. "Public infrastructure investment, output dynamics, and balanced budget fiscal rules," Journal of Economic Dynamics and Control, Elsevier, vol. 40(C), pages 334-354.
    6. Philip Arestis, 2011. "Fiscal Policy Is Still an Effective Instrument of Macroeconomic Policy," Panoeconomicus, Savez ekonomista Vojvodine, Novi Sad, Serbia, vol. 58(2), pages 143-156, June.
    7. Guerguil, Martine & Mandon, Pierre & Tapsoba, René, 2017. "Flexible fiscal rules and countercyclical fiscal policy," Journal of Macroeconomics, Elsevier, vol. 52(C), pages 189-220.
    8. Mauricio Mesquita Moreira & Paolo Giordano & Antoni Estevadeordal & Tomás Serebrisky & Jordan Schwartz & Ricardo Sánchez & Aiga Stokenberga, 2010. "Nota de Discusión de Politícas: Cómo Reducir Las Brechas de Integración (Escenarios y Recomendaciones de Políticas para Promover la Infraestructura Física y Reducir los Costes del Comercio Intrarregio," IDB Publications (Working Papers) 9338, Inter-American Development Bank.

    More about this item

    Keywords

    Debt Markets; Public Sector Expenditure Analysis&Management; Access to Finance; Public Sector Economics&Finance;
    All these keywords.

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