The Golden Rule and the Economic Cycles
The present formulation of the golden rule in the United Kingdom allows fiscal performance to be tested explicitly on an ex-post basis. However, it requires precise dating of the economic cycle, which can lead to significant controversy. Also, the need to aim for current balance or better "over the cycle" may force fiscal policy to be procyclical toward the end of cycles. Using dynamic stochastic simulations, the paper suggests that making the formulation of the golden rule forward-looking and independent of the dating of the economic cycle would reduce the risk of procyclicality and enhance macroeconomic stability.
|Date of creation:||01 Aug 2007|
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- Michael Kell, 2001. "An Assessment of Fiscal Rules in the United Kingdom," IMF Working Papers 01/91, International Monetary Fund.
- Keiko Honjo & Ben Hunt, 2006. "Stabilizing Inflation in Iceland," IMF Working Papers 06/262, International Monetary Fund.
- M Artis, 2002. "Dating the Business Cycle in Britain," Centre for Growth and Business Cycle Research Discussion Paper Series 17, Economics, The Univeristy of Manchester.
- Douglas Laxton & Andrew Berg & Philippe D Karam, 2006. "Practical Model-Based Monetary Policy Analysis: A How-To Guide," IMF Working Papers 06/81, International Monetary Fund.
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