The Political Economy of Non-Compliance with the Golden Rule of Public Finance

Yuki Uchida () and Tetsuo Ono ()
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Yuki Uchida: Faculty of Economics, Seikei University
Tetsuo Ono: Graduate School of Economics, The University of Osaka

No 25-01-Rev., Discussion Papers in Economics and Business from Osaka University, Graduate School of Economics

Abstract: This study examines the limitations of political equilibrium in fiscal policy when shortsighted governments represent only the middle-aged and older adult generations, in contrast to a Ramsey planner who values them as well as the young and future generations. Using a three-period overlapping generations model calibrated to Germany, Japan, and the United Kingdom, we analyze the Golden Rule of Public Finance (GR), which permits deficit financing solely for public investment. We find that: (i) reduced GR compliance shifts fiscal burdens from the middle-aged to the older adult, young, and future generations; (ii) compliance depends on the elasticity of public capital, preferences for public goods, and GDP growth; and (iii) non-compliance drives political equilibrium away from the Ramsey allocation. Extending voting rights to the young is a more effective mechanism for mitigating inefficiency and enhancing fiscal rule compliance than Demeny voting, which allocates additional votes to the middle-aged based on the number of their children.

Keywords: Fiscal Rule; Golden Rule of Public Finance; Probabilistic Voting; Overlapping Generations; Political Distortions (search for similar items in EconPapers)
JEL-codes: D70 E62 H63 (search for similar items in EconPapers)
Pages: 63 pages
Date: 2025-01, Revised 2026-02
New Economics Papers: this item is included in nep-dge
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