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Politics and Efficiency of Separating Capital and Ordinary Government Budgets

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  • Marco Bassetto

Abstract

We analyze a "golden rule" that separates capital and ordinary account budgets and allows a government to finance only capital items with debt. Many national governments followed this rule in the eighteenth and nineteenth centuries, and most U. S. states do today. We study an overlapping-generations economy where majorities choose durable and nondurable public goods in each period. When demographics imply even moderate departures from Ricardian equivalence, the golden rule substantially improves efficiency. Examples calibrated to U. S. demographics show greater improvements at the state level or with nineteenth century demographics than under current national demographics.

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  • Marco Bassetto, 2006. "Politics and Efficiency of Separating Capital and Ordinary Government Budgets," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 121(4), pages 1167-1210.
    • Handle: RePEc:oup:qjecon:v:121:y:2006:i:4:p:1167-1210.
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    File URL: http://hdl.handle.net/10.1093/qje/121.4.1167
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    More about this item

    JEL classification:

    • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
    • H6 - Public Economics - - National Budget, Deficit, and Debt
    • H7 - Public Economics - - State and Local Government; Intergovernmental Relations

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