A better budget rule

Michael Dothan and Fred Thompson ()
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Michael Dothan: Guy F. Atkinson Professor of Economics and Finance, Atkinson Graduate School of Management, Willamette University, and author of Prices in Financial Markets, Postal: Guy F. Atkinson Professor of Economics and Finance, Atkinson Graduate School of Management, Willamette University, and author of Prices in Financial Markets

Journal of Policy Analysis and Management, 2009, vol. 28, issue 3, 463-478

Abstract: Debt limits, interest coverage ratios, one-off balanced budget requirements, pay-as-you-go rules, and tax and expenditure limits are among the most important fiscal rules for constraining intertemporal transfers. There is considerable evidence that the least costly and most effective of such rules are those that focus directly on the rate of spending growth, even with their seemingly ad hoc nature and possibilities for circumvention. In this paper, we use optimal control theory and martingale methods to justify a transparent, nonarbitrary rule governing maximum sustainable rate of spending growth, treating the revenue structure of a jurisdiction as a given continuous-time stochastic process. Our results can be used to determine whether a proposed rate of spending growth is sustainable or not. © 2009 by the Association for Public Policy Analysis and Management

Date: 2009
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Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:wly:jpamgt:v:28:y:2009:i:3:p:463-478

DOI: 10.1002/pam.20441

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