Politics and efficiency of separating capital and ordinary government budgets

Marco Bassetto, Thomas J. Sargent

    Research output: Contribution to journalArticlepeer-review

    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

    ASJC Scopus subject areas

    • Economics and Econometrics

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