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Politics and Efficiency of Separating Capital and Ordinary Government Budgets

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Author Info
Marco Bassetto
Thomas J Sargent

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Abstract

We analyze a "golden rule" that separates capital and ordinary account budgets and allows a government to finance only capital items with debt. Many national governments followed this rule in the eighteenth and nineteenth centuries, and most U. S. states do today. We study an overlapping-generations economy where majorities choose durable and nondurable public goods in each period. When demographics imply even moderate departures from Ricardian equivalence, the golden rule substantially improves efficiency. Examples calibrated to U. S. demographics show greater improvements at the state level or with nineteenth century demographics than under current national demographics. Copyright by the President and Fellows of Harvard College and the Massachusetts Institute of Technology.

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File URL: http://www.mitpressjournals.org/doi/pdfplus/10.1162/qjec.121.4.1167
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Article provided by MIT Press in its journal The Quarterly Journal of Economics.

Volume (Year): 121 (2006)
Issue (Month): 4 (November)
Pages: 1167-1210
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Handle: RePEc:tpr:qjecon:v:121:y:2006:i:4:p:1167-1210

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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  25. Marco Bassetto & Thomas Sargent, 2005. "Politics and Efficiency of Separating Capital and Ordinary Government Budgets," NBER Working Papers 11030, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  1. Roel M.W.J. Beetsma & Frederick van der Ploeg, 2007. "Partisan Public Investment and Debt: The Case for Fiscal Restrictions," Economics Working Papers ECO2007/37, European University Institute. [Downloadable!]
  2. Marco Bassetto & Vadym Lepetyuk, 2007. "Government Investment and the European Stability and Growth Pact," NBER Working Papers 13200, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  3. Marco Bassetto, 2008. "Public investment and budget rules for state vs. local governments," Working Paper Series WP-08-21, Federal Reserve Bank of Chicago. [Downloadable!]
  4. Martín Gonzales-Eiras & Dirk Niepelt, 2007. "Population Ageing, Government Budgets, and Productivity Growth in Politico-Economic Equilibrium," Working Papers 07.05, Swiss National Bank, Study Center Gerzensee. [Downloadable!]
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  5. Assar Lindbeck & Dirk Niepelt, 2005. "Improving the SGP: Taxes and Delegation rather than Fines," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
    Other versions:
  6. Eric Maskin & Jean Tirole, 2006. "Public-private Partnerships and Government Spending Limits," Economics Working Papers 0075, Institute for Advanced Study, School of Social Science. [Downloadable!]
    Other versions:
  7. Marco Bassetto, 2009. "The Research Agenda: Marco Bassetto on the Quantitative Evaluation of Fiscal Policy Rules," EconomicDynamics Newsletter, Review of Economic Dynamics, vol. 10(2), April. [Downloadable!]
  8. Beetsma, Roel & van der Ploeg, Frederick, 2007. "The Political Economy of Public Investment," CEPR Discussion Papers 6090, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  9. Marco Bassetto & Thomas J. Sargent, 2005. "Politics and efficiency of separating capital and ordinary Government budgets," Working Paper Series WP-05-07, Federal Reserve Bank of Chicago. [Downloadable!]
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  10. Battaglini, Marco & Coate, Stephen, 2007. "A Dynamic Theory of Public Spending, Taxation and Debt," Working Papers 07-04, Cornell University, Center for Analytic Economics. [Downloadable!]
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  11. Jon H. Fiva & Gisle James Natvik, 2009. "Do Re-election Probabilities Influence Public Investment?," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
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  12. Paul Klein & Per Krusell & José-Víctor Ríos-Rull, 2004. "Time-Consistent Public Expenditures," Levine's Bibliography 122247000000000652, UCLA Department of Economics. [Downloadable!]
    Other versions:
  13. Davina F. Jacobs, 2008. "A Review of Capital Budgeting Practices," IMF Working Papers 08/160, International Monetary Fund. [Downloadable!]
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