Ekonomi-tek 2146-6173 2791-7991 Türkiye Ekonomi Kurumu Vakfı Economics Ekonomi The Golden Rule of Public Finance: A Panacea? The Golden Rule of Public Finance: A Panacea? İsmihan Mustafa ATILIM UNIVERSITY Özkan F. Gülçin University of York 05 01 2012 1 2 1 20 03 01 2012 Copyright © 2012, Ekonomi-tek 2012 Ekonomi-tek

The fiscal stimulus packages that were put in place in the wake of the recent global financial crisis consisted of massive public investment spending. Moreover, substantial increases in public debt levels in the aftermath of the crisis have highlighted the importance of fiscal discipline and thus the appropriate form of fiscal policy regimes. Motivated by these experiences, this paper provides a comparative assessment of two fiscal regimes: a balanced budget rule with tax finance and a golden rule with debt finance, with special reference to the level and the efficiency of public investment. We find that, although the golden rule is likely to be more public investment-friendly, adopting a golden rule rather than a balanced-budget 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 expansion of public investment beneficial. As such, we arguethat policymakers should prioritize the productivity of public investment, not just its level.

The fiscal stimulus packages that were put in place in the wake of the recent global financial crisis consisted of massive public investment spending. Moreover, substantial increases in public debt levels in the aftermath of the crisis have highlighted the importance of fiscal discipline and thus the appropriate form of fiscal policy regimes. Motivated by these experiences, this paper provides a comparative assessment of two fiscal regimes: a balanced budget rule with tax finance and a golden rule with debt finance, with special reference to the level and the efficiency of public investment. We find that, although the golden rule is likely to be more public investment-friendly, adopting a golden rule rather than a balanced-budget 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 expansion of public investment beneficial. As such, we arguethat policymakers should prioritize the productivity of public investment, not just its level.

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