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

Author

Listed:
  • Uchida, Yuki
  • Ono, Tetsuo
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.

Suggested Citation

  • Uchida, Yuki & Ono, Tetsuo, 2023. "Borrowing to Finance Public Investment: A Politico-Economic Analysis of Fiscal Rules," MPRA Paper 119724, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:119724
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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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