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The Golden Rule of Public Finance: A Panacea?

Author

Listed:
  • Mustafa Ismihan

    (Atýlým University)

  • F. Gülçin Özkan

    (University of York)

Abstract

The fiscal stimulus packages that were put in place in the wake of the recent global financial crisis consisted of massive public investment spending. Moreover, substantial increases in public debt levels in the aftermath of the crisis have highlighted the importance of fiscal discipline and thus the appropriate form of fiscal policy regimes. Motivated by these experiences, this paper provides a comparative assessment of two fiscal regimes: a balancedbudget rule with tax finance and a golden rule with debt finance, with special reference to the level and the efficiency of public investment. We find that, although the golden rule is likely to be more public investment-friendly, adopting a golden rule rather than a balanced-budget rule does not guarantee that public investment will improve economic outcomes. Our results suggest that only when the rate of return on public capital is greater than the cost of public borrowing expansion of public investment beneficial. As such, we argue that policymakers should prioritize the productivity of public investment, not just its level.

Suggested Citation

  • Mustafa Ismihan & F. Gülçin Özkan, 2012. "The Golden Rule of Public Finance: A Panacea?," Ekonomi-tek - International Economics Journal, Turkish Economic Association, vol. 1(2), pages 1-20, May.
    • Handle: RePEc:tek:journl:v:1:y:2012:i:2:p:1-20
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    References listed on IDEAS

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    Cited by:

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    2. Bowen, Alex, 2011. "Raising finance to support developing country action: some economic considerations," LSE Research Online Documents on Economics 37572, London School of Economics and Political Science, LSE Library.

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    More about this item

    Keywords

    Public investment; public debt; golden rule; balanced budget rule;
    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
    • H50 - Public Economics - - National Government Expenditures and Related Policies - - - General
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

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