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A better budget rule

Author

Listed:
  • Michael Dothan

    (Guy F. Atkinson Professor of Economics and Finance, Atkinson Graduate School of Management, Willamette University, and author of Prices in Financial Markets)

  • Fred Thompson

    (Director of Willamette University's Center for Governance and Public Policy Research. He is a recipient of the Association for Budgeting and Financial Management's Aaron B. Wildavsky award for scholarly achievement)

Abstract

Debt limits, interest coverage ratios, one-off balanced budget requirements, pay-as-you-go rules, and tax and expenditure limits are among the most important fiscal rules for constraining intertemporal transfers. There is considerable evidence that the least costly and most effective of such rules are those that focus directly on the rate of spending growth, even with their seemingly ad hoc nature and possibilities for circumvention. In this paper, we use optimal control theory and martingale methods to justify a transparent, nonarbitrary rule governing maximum sustainable rate of spending growth, treating the revenue structure of a jurisdiction as a given continuous-time stochastic process. Our results can be used to determine whether a proposed rate of spending growth is sustainable or not. © 2009 by the Association for Public Policy Analysis and Management

Suggested Citation

  • Michael Dothan & Fred Thompson, 2009. "A better budget rule," Journal of Policy Analysis and Management, John Wiley & Sons, Ltd., vol. 28(3), pages 463-478.
    • Handle: RePEc:wly:jpamgt:v:28:y:2009:i:3:p:463-478
    DOI: 10.1002/pam.20441
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    References listed on IDEAS

    as
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    Cited by:

    1. Kawika Pierson & Jon C. Thompson & Fred Thompson, 2024. "Do what we did last year, but do not stray too far from the pack: A behavioral public finance approach to municipal cash reserves," Journal of Regional Science, Wiley Blackwell, vol. 64(3), pages 786-803, June.
    2. Fred Thompson & Kawika Pierson & Michael L. Hand & Michael U. Dothan, 2017. "Is a Good Normative Model of Public Spending Run Backward a Good Positive Model?," Public Budgeting & Finance, Wiley Blackwell, vol. 37(2), pages 35-57, June.
    3. Popescu, Razvan-Florin & Prodan, Sergiu, 2010. "The analysis of budget rules and macroeconomic implications in several developed economies," MPRA Paper 25897, University Library of Munich, Germany, revised 2010.
    4. David Laibson, 1997. "Golden Eggs and Hyperbolic Discounting," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 112(2), pages 443-478.

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