Consequences of a Golden Rule distinguishing between investment and consumption public expenditure

What is it about?

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 don’t make any difference 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 both types of public expenditures. 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 the productivity of public investment and where taxation rates are the 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 prices elasticity of supply are the weakest, whereas supply-side distortions are the strongest.

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