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Political Economy of Non-Compliance with the Golden Rule of Public Finance

Author

Listed:
  • Yuki Uchida

    (Faculty of Economics, Seikei University)

  • Tetsuo Ono

    (Graduate School of Economics, Osaka University)

Abstract

This study examines the limitations of political equilibrium in fiscal policy formation by short-sighted governments that represent only the currently living generations, as compared to an allocation determined by a long-lived planner who values both current and future generations. Using an overlapping-generations model calibrated to Germany, Japan, and the United Kingdom, we evaluate the role of the Golden Rule of Public Finance (GR), which restricts deficit financing to public investment. The findings reveal that (i) reduced GR compliance shifts fiscal burdens from middle-aged voters to future generations and older adults, resulting in spillover effects; (ii) GR compliance is significantly influenced by the elasticity of public capital to investment, preferences for public goods, and GDP growth rates; and (iii) non-compliance with the GR causes political equilibrium to diverge from the planner’s optimal allocation.

Suggested Citation

  • Yuki Uchida & Tetsuo Ono, 2025. "Political Economy of Non-Compliance with the Golden Rule of Public Finance," Discussion Papers in Economics and Business 25-01, Osaka University, Graduate School of Economics.
    • Handle: RePEc:osk:wpaper:2501
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    More about this item

    Keywords

    Fiscal Rule; Golden Rule of Public Finance; Probabilistic Voting; Overlapping Generations; Political Distortions;
    All these keywords.

    JEL classification:

    • D70 - Microeconomics - - Analysis of Collective Decision-Making - - - General
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

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