The Effect of Fiscal Rules on Public Investment if Budget Deficits are Politically Motivated
1997-11-12
Research Paper
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Uncertainty about the future preferences of the government may induce policy makers to run excessive budget deficits. As a solution to this problem, economists have proposed to impose a binding debt rule. In this paper we argue that a binding debt rule does not eliminate the distortions due to strategic behaviour of politicians. Rather, strategic manipulation shifts from public debt to public investment. As an alternative, we examine the effects of a capital borrowing rule which permits the government to run a budget deficit equal to the amount of public investment. We show that this rule effectively eliminates strategic behaviour.
Keywords
Classifications using
Journal of Economic Literature (JEL) Classification System
- D72 : Economic Models of Political Processes: Rent-Seeking, Elections, Legislatures, and Voting Behavior
- H62 : Deficit; Surplus
- E62 : Fiscal Policy; Public Expenditures, Investment, and Finance; Taxation
- H61 : Budget; Budget Systems
Automatically Extracted Terms
- investment
- capital borrowing rule
- binding debt rule
- period
- policy
- budget
- deficit
- party
- policy maker
- maker
- budget deficits
- binding
- office
- government
- capital
- policy makers
- borrowing
- debt rule
- consumption
- budget deficit
