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Golden Rule of Public Finance: A Panacea?

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  • M Ismihan
  • G Ozkan

Abstract

This paper shows that adopting a golden rule does not guarantee that public investment will improve economic outcomes. Our results suggest that only when the rate of return on public capital is greater than the cost of public borrowing, expandingpublic investment is beneficial. Otherwise, both macroeconomic stability and debt sustainability are compromised. As such, we argue that policy-makers should prioritise the productivity of public investment rather than its level.

Suggested Citation

  • M Ismihan & G Ozkan, 2008. "Golden Rule of Public Finance: A Panacea?," Discussion Papers 08/19, Department of Economics, University of York.
    • Handle: RePEc:yor:yorken:08/19
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    References listed on IDEAS

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    1. Beetsma, Roel M. W. J. & Bovenberg, A. Lans, 1999. "Does monetary unification lead to excessive debt accumulation?," Journal of Public Economics, Elsevier, vol. 74(3), pages 299-325, December.
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    9. Fabrizio Balassone & Daniele Franco, 2000. "Public investment, the Stability Pact and the ‘golden rule’," Fiscal Studies, Institute for Fiscal Studies, vol. 21(2), pages 207-229, June.
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    Cited by:

    1. Bowen, Alex, 2011. "Raising finance to support developing country action: some economic considerations," LSE Research Online Documents on Economics 37572, London School of Economics and Political Science, LSE Library.
    2. Alex Bowen, 2011. "Raising climate finance to support developing country action: some economic considerations," Climate Policy, Taylor & Francis Journals, vol. 11(3), pages 1020-1036, May.

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    More about this item

    Keywords

    Public investment; public debt; golden rule.;
    All these keywords.

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H50 - Public Economics - - National Government Expenditures and Related Policies - - - General
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

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