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Balanced-Budget Rules: Welfare Loss and Optimal Policies

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  • David R. Stockman

    (University of Delaware)

Abstract

Most economic models do not suggest an optimal fiscal policy in which the government's budget is balanced each period. Conventional wisdom suggests that the government run surpluses and deficits to smooth taxes. In this paper, I use an approach which brings together real business cycle theory and the theory of public finance to evaluate the effects of a balanced-budget restriction. Four fiscal policies are investigated in a model with growth. All models are solved numerically using a multidimensional collocation parameterized expectations algorithm. The welfare consequences of each policy are measured, and the optimal Ramsey policies are characterized. (Copyright: Elsevier)

Suggested Citation

  • David R. Stockman, 2001. "Balanced-Budget Rules: Welfare Loss and Optimal Policies," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 4(2), pages 438-459, July.
    • Handle: RePEc:red:issued:v:4:y:2001:i:2:p:438-459
    DOI: 10.1006/redy.2000.0122
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    References listed on IDEAS

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    More about this item

    Keywords

    Ramsey equilibrium; real business cycle theory; balanced-budget rules;
    All these keywords.

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory

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