The golden rule of public finance under active monetary stance: endogenous setting for a developing economy

Serhii Shvets

doi:10.21511/imfi.17(2).2020.17

Abstract

The paper aims to verify the introduction of the golden rule of public finance under an active monetary stance for a developing economy using a dynamic stochastic general equilibrium model. Besides the two rigidities, namely the deep habit formation and Calvo-style price stickiness, the model structure incorporates real money holdings and welfare-enhancing government purchases in the utility-generating function and a modified Taylor rule. The simulation results have validated the visible crowding-out of private consumption and investment in the short run and a positive impact of the productive government spending on long-run growth, but with some important caveats. In the case of a developing economy that usually has low efficiency and high returns to public capital, the given factors prove significant in addressing the study issue. The results are robust in terms of the structure of utility-generating function, a relatively high share of liquidity-constrained households, and a degree of price stickiness. Moreover, to offset the debt accumulation as a result of increased public investment financing by persistent output growth, in the long run, the central bank should not only rely on response to the fluctuation of inflation and output but also account for a move of public debt.

Highlights

The increased number of crises since the end of the 20th century has been a trigger for a new discussion dedicated to effective growth policy
The paper aims to verify the introduction of the golden rule of public finance under an active monetary stance for a developing economy using a dynamic stochastic general equilibrium model
As opposed to the mentioned results, the pos- academic community pays to monetary policy itive effect of the golden rule of public finance (GRPF) regime introduction was stance in the GRPF study, the goal of the presnot confirmed in the long run but was present in ent paper is to explore the endogenous growth of the short run, according to the research of Minea a developing economy under a combination of and Villieu (2009)

Summary

INTRODUCTION

The increased number of crises since the end of the 20th century has been a trigger for a new discussion dedicated to effective growth policy. As opposed to the mentioned results, the pos- academic community pays to monetary policy itive effect of the GRPF regime introduction was stance in the GRPF study, the goal of the presnot confirmed in the long run but was present in ent paper is to explore the endogenous growth of the short run, according to the research of Minea a developing economy under a combination of and Villieu (2009). The research has validated the presence condition, the expected budget deficit is a matter of notable crowding-out of private consumption of tax financing in the long run, as well as a lower and investment in the short-run and the positive level of growth. Crucial points of the GRPF study. Kellermann (2007) has correctly pointed out that the GRPF regime’s introduction does not guarantee a long-run

METHODOLOGY

Monetary authority

Calibration

Results

DISCUSSION

CONCLUSION