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The Tyranny of Rules: Fiscal Discipline, Productive Spending, and Growth

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Author Info
P R Agénor
D Yilmaz

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Abstract

The performance of alternative fiscal rules is examined in an endogenous growth model with public capital and debt. In addition to investing in infrastructure, the government spends on maintenance and health. Infrastructure affects the production of both commodities and health services. The performance of a balanced budget rule, as well as standard and modified (including and excluding productive spending) golden rules and primary surplus rules are compared numerically. Under a range of plausible parameter configurations and spending shares, and as long as the debt-related risk premium is not too elastic, a primary surplus rule that excludes productive spending is shown to perform better than alternative rules in response to a variety of shocks. As a practical policy implication, we propose the definition of a transparent Core Productive Expenditure Program.

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File URL: http://www.socialsciences.manchester.ac.uk/cgbcr/dpcgbcr/dpcgbcr73.pdf
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Paper provided by Economics, The Univeristy of Manchester in its series Centre for Growth and Business Cycle Research Discussion Paper Series with number 73.

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Length: 64 pages
Date of creation: 2006
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Handle: RePEc:man:cgbcrp:73

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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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  29. Stephane Pallage & Michel A. Robe, 2003. "On the Welfare Cost of Economic Fluctuations in Developing Countries," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 44(2), pages 677-698, 05. [Downloadable!] (restricted)
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Cited by:
(explanations, 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.)

  1. Moreno-Dodson, Blanca, 2008. "Assessing the impact of public spending on growth - an empirical analysis for seven fast growing countries," Policy Research Working Paper Series 4663, The World Bank. [Downloadable!]
  2. Semmler, Willi & Greiner, Alfred & Diallo, Bobo & Rezai, Armon & Rajaram, Anand, 2007. "Fiscal policy, public expenditure composition, and growth theory and empirics," Policy Research Working Paper Series 4405, The World Bank. [Downloadable!]
  3. Agenor, Pierre-Richard & Moreno-Dodson, Blanca, 2006. "Public infrastructure and growth : new channels and policy implications," Policy Research Working Paper Series 4064, The World Bank. [Downloadable!]
  4. Groneck, Max, 2008. "A Golden Rule of Public Finance or a Fixed Deficit Regime? Growth and Welfare Effects of Budget Rules," FiFo-CPE Discussion Papers - Finanzwissenschaftliche Diskussionsbeiträge 08-7, University of Cologne, CPE - Cologne Center for Public Economics. [Downloadable!]
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