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The Golden Rule and the Economic Cycles

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  • Keiko Honjo

Abstract

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.

Suggested Citation

  • Keiko Honjo, 2007. "The Golden Rule and the Economic Cycles," IMF Working Papers 07/199, International Monetary Fund.
  • Handle: RePEc:imf:imfwpa:07/199
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    References listed on IDEAS

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    1. Michael Artis, 2002. "Dating the Business Cycle in Britain," National Institute Economic Review, National Institute of Economic and Social Research, vol. 182(1), pages 90-95, October.
    2. Michael Kell, 2001. "An Assessment of Fiscal Rules in the United Kingdom," IMF Working Papers 01/91, International Monetary Fund.
    3. 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.
    4. Keiko Honjo & Benjamin L Hunt, 2006. "Stabilizing Inflation in Iceland," IMF Working Papers 06/262, International Monetary Fund.
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    1. repec:eee:ecmode:v:65:y:2017:i:c:p:138-146 is not listed on IDEAS

    More about this item

    Keywords

    Business cycles; Fiscal policy; Golden rule; fiscal rule; procyclical fiscal policy; economic cycle; macroeconomic stability; fiscal balance; fiscal performance; public finances;

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