The Tyranny of Rules: Fiscal Discipline, Productive Spending, and Growth

Pierre-Richard Agénor () and D Yilmaz

Centre for Growth and Business Cycle Research Discussion Paper Series from Economics, The Univeristy of Manchester

Abstract: The performance of alternative fiscal rules is examined in an endogenous growth model with public capital and debt. In addition to investing in infrastructure, the government spends on maintenance and health. Infrastructure affects the production of both commodities and health services. The performance of a balanced budget rule, as well as standard and modified (including and excluding productive spending) golden rules and primary surplus rules are compared numerically. Under a range of plausible parameter configurations and spending shares, and as long as the debt-related risk premium is not too elastic, a primary surplus rule that excludes productive spending is shown to perform better than alternative rules in response to a variety of shocks. As a practical policy implication, we propose the definition of a transparent Core Productive Expenditure Program.

New Economics Papers: this item is included in nep-pbe
Date: 2006
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