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

Yuki Uchida and Tetsuo Ono

No 25-01, 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 formation by short-sighted governments that represent only the currently living generations, as compared to an allocation determined by a long-lived planner who values both current and future generations. Using an overlapping-generations model calibrated to Germany, Japan, and the United Kingdom, we evaluate the role of the Golden Rule of Public Finance (GR), which restricts deficit financing to public investment. The findings reveal that (i) reduced GR compliance shifts fiscal burdens from middle-aged voters to future generations and older adults, resulting in spillover effects; (ii) GR compliance is significantly influenced by the elasticity of public capital to investment, preferences for public goods, and GDP growth rates; and (iii) non-compliance with the GR causes political equilibrium to diverge from the planner’s optimal allocation.

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: 49 pages
Date: 2025-01
New Economics Papers: this item is included in nep-dge, nep-pbe and nep-pol
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