Borrowing to Finance Public Investment: A Politico-Economic Analysis of Fiscal Rules

Uchida, Yuki and Ono, Tetsuo (2023): Borrowing to Finance Public Investment: A Politico-Economic Analysis of Fiscal Rules.

Abstract

This study examines the golden rule of public finance, distinguishing between public investment and consumption spending when borrowing, allowing for exclusively debt-financed public investment. Explored within an overlapping-generations model that encompasses the accumulation of physical and public capital, the rule and its associated fiscal policy emerge internally, selected by short-lived governments that represent current generations. The model is calibrated for Germany, Japan, and the United Kingdom, demonstrating adherence to the rule in Germany and deviation from it in Japan and the United Kingdom, which aligns with the available evidence. The evaluation from the perspective of a long-term planner reveals the government’s excessive choices in public debt across these countries.

• Item Type: MPRA Paper
• Language: English
• Keywords: Fiscal Rule; Golden Rule of Public Finance; Probabilistic Voting; Overlapping Generations; Political Distortions
• Subjects: D - Microeconomics > D7 - Analysis of Collective Decision-Making > D70 - General; E - Macroeconomics and Monetary Economics > E6 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook > E62 - Fiscal Policy; H - Public Economics > H6 - National Budget, Deficit, and Debt > H63 - Debt ; Debt Management ; Sovereign Debt

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