Politics and Efficiency of Separating Capital and Ordinary Government Budgets

Marco Bassetto and Thomas Sargent ()

The Quarterly Journal of Economics, 2006, vol. 121, issue 4, pages 1167-1210

Abstract: We analyze a "golden rule" that separates capital and ordinary account budgets and allows a government to finance only capital items with debt. Many national governments followed this rule in the eighteenth and nineteenth centuries, and most U. S. states do today. We study an overlapping-generations economy where majorities choose durable and nondurable public goods in each period. When demographics imply even moderate departures from Ricardian equivalence, the golden rule substantially improves efficiency. Examples calibrated to U. S. demographics show greater improvements at the state level or with nineteenth century demographics than under current national demographics. Copyright by the President and Fellows of Harvard College and the Massachusetts Institute of Technology.

Date: 2006
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Working Paper: Politics and Efficiency of Separating Capital and Ordinary Government Budgets (2004)
Working Paper: Politics and Efficiency of Separating Capital and Ordinary Government Budgets (2005)
Working Paper: Politics and efficiency of separating capital and ordinary Government budgets (2005)
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