Template-Type: ReDIF-Paper 1.0
Series: Tinbergen Institute Discussion Papers
Creation-Date: 1997-12-03
Number: 97-125/1
Author-Name: Robert A.J. Dur
Author-Email: dur@few.eur.nl
Author-Workplace-Name: Erasmus University Rotterdam
Author-Name: Ben D. Peletier
Author-Workplace-Name: Erasmus University Rotterdam
Author-Name: Otto H. Swank
Author-Email: swank@few.eur.nl
Author-Workplace-Name: Erasmus University Rotterdam
Title: The Effect of Fiscal Rules on Public Investment if Budget Deficits are Politically Motivated
Abstract: Uncertainty about the future preferences of the government may induce policy makers to run excessive budget deficits. As a solution to this problem, economists have proposed to impose a binding debt rule. In this paper we argue that a binding debt rule does not eliminate the distortions due to strategic behaviour of politicians. Rather, strategic manipulation shifts from public debt to public investment. As an alternative, we examine the effects of a capital borrowing rule which permits the government to run a budget deficit equal to the amount of public investment. We show that this rule effectively eliminates strategic behaviour.
Classification-JEL: D72; E62; H61; H62
Keywords: fiscal rules; budget deficits; public investment
File-Url: https://papers.tinbergen.nl/97125.pdf
File-Format: application/pdf
File-Size: 110418 bytes
Handle: RePEc:tin:wpaper:19970125