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The tyranny of rules: fiscal discipline, productive spending, and growth in a perfect foresight model

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  • Pierre-Richard Agenor
  • S. Devrim Yilmaz

Abstract

The performance of alternative fiscal rules is examined in an endogenous growth model. The government spends money on infrastructure, maintenance, and health. Infrastructure affects the production of both commodities and health services. The performance of a balanced budget rule, as well as standard and modified golden rules (including and excluding productive spending) and primary surplus rules are compared numerically. Under a range of plausible parameter configurations, a primary surplus rule that excludes productive spending performs better (in a growth sense, although not necessarily from the perspective of short-run macro stability) than alternative rules in response to a variety of shocks.

Suggested Citation

  • Pierre-Richard Agenor & S. Devrim Yilmaz, 2011. "The tyranny of rules: fiscal discipline, productive spending, and growth in a perfect foresight model," Journal of Economic Policy Reform, Taylor & Francis Journals, vol. 14(1), pages 69-99.
  • Handle: RePEc:taf:jpolrf:v:14:y:2011:i:1:p:69-99
    DOI: 10.1080/17487870.2010.503086
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    References listed on IDEAS

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    1. Buti, Marco, 2003. "Revisiting the stability and growth pact: grand design or internal adjustment?," Sede de la CEPAL en Santiago (Estudios e Investigaciones) 34908, Naciones Unidas Comisión Económica para América Latina y el Caribe (CEPAL).
    2. Buti, Marco & Eijffinger, Sylvester C.W. & Franco, Daniele, 2003. "Revisiting the stability and growth pact: grand design or internal adjustment?," Seminarios y Conferencias 6567, Naciones Unidas Comisión Económica para América Latina y el Caribe (CEPAL).
    3. George Kopits, 2001. "Fiscal Rules; Useful Policy Framework or Unnecessary Ornament?," IMF Working Papers 01/145, International Monetary Fund.
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    Cited by:

    1. Huang, Wei Hong & Chen, Yang & Rudkin, Simon, 2014. "Dynamic Fiscal competition with public infrastructure investment: Austerity and attracting capital inflow," RIEI Working Papers 2014-03, Xi'an Jiaotong-Liverpool University, Research Institute for Economic Integration, revised 02 Mar 2016.

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