Politics and efficiency of separating capital and ordinary government budgets

Marco Bassetto, Thomas Sargent

    Research output: Contribution to journalArticle

    Abstract

    We analyze a "golden rule" that separates capital and ordinary account budgets and allows a government to finance only capital items with debt. Many national governments followed this rule in the eighteenth and nineteenth centuries, and most U. S. states do today. We study an overlapping-generations economy where majorities choose durable and nondurable public goods in each period. When demographics imply even moderate departures from Ricardian equivalence, the golden rule substantially improves efficiency. Examples calibrated to U. S. demographics show greater improvements at the state level or with nineteenth century demographics than under current national demographics.

    Original languageEnglish (US)
    Pages (from-to)1167-1210
    Number of pages44
    JournalQuarterly Journal of Economics
    Volume121
    Issue number4
    DOIs
    StatePublished - Nov 2006

    Fingerprint

    Government budget
    Demographics
    Government
    Golden rule
    Finance
    Ricardian equivalence
    Durables
    18th century
    Overlapping generations
    Debt

    ASJC Scopus subject areas

    • Economics and Econometrics

    Cite this

    Politics and efficiency of separating capital and ordinary government budgets. / Bassetto, Marco; Sargent, Thomas.

    In: Quarterly Journal of Economics, Vol. 121, No. 4, 11.2006, p. 1167-1210.

    Research output: Contribution to journalArticle

    Bassetto, Marco ; Sargent, Thomas. / Politics and efficiency of separating capital and ordinary government budgets. In: Quarterly Journal of Economics. 2006 ; Vol. 121, No. 4. pp. 1167-1210.
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