The tyranny of rules: fiscal discipline, productive spending, and growth in a perfect foresight model

Abstract

The performance of alternative fiscal rules is examined in an endogenous growth model. The government spends money on infrastructure, maintenance, and health. Infrastructure affects the production of both commodities and health services. The performance of a balanced budget rule, as well as standard and modified golden rules (including and excluding productive spending) and primary surplus rules are compared numerically. Under a range of plausible parameter configurations, a primary surplus rule that excludes productive spending performs better (in a growth sense, although not necessarily from the perspective of short‐run macro stability) than alternative rules in response to a variety of shocks.