ADVANTAGES OF FOLLOWING A GOLDEN RULE IN A MONETARY UNION

Séverine Menguy

Macroeconomic Dynamics, 2017, vol. 21, issue 2, 279-310

Abstract: The European sovereign debt crisis has revived the debate about appropriate fiscal rules in the European Economic and Monetary Union. Whereas the Stability and Growth Pact and the Fiscal Compact make no distinction between public consumption and investment expenditure, the aim of the current paper is to analyze the implications of the adoption of the Golden rule in a monetary union, distinguishing between the two types of public expenditure. With the help of a macroeconomic model, we show that introducing a Golden rule and smoothing public investment expenditure would be welfare-improving, and mostly for countries where taxation rates and the productivity of public investment are highest, and for the most closed countries. It would also be the most beneficial for countries where the monetary transmission parameter, the propensity to consume, and the price elasticity of supply are weakest, whereas supply-side distortions are the strongest.

Date: 2017
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Persistent link: https://EconPapers.repec.org/RePEc:cup:macdyn:v:21:y:2017:i:02:p:279-310_00

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