THE IMPACT OF SIMPLE FISCAL RULES IN GROWTH MODELS WITH PUBLIC GOODS AND CONGESTION

In this paper we examine the implication of a simple class of fiscal rules for long-run economic growth and welfare. The Golden Rule of Public Finance that we examine is motivated by institutional arrangements in countries such as Germany and the UK. We find that rules that seek to limit government borrowing to productive investment spending have a clear justification in terms of growth and welfare when government-provided goods are otherwise excessively provided. Even in the case where it is private consumption that is excessive, the Golden Rule of Public Finance is likely to be good from a growth perspective, but the welfare effects are more ambiguous. Copyright � 2007 The Authors; Journal compilation � 2007 Blackwell Publishing Ltd and The University of Manchester.