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

  • Received April 27, 2020;
    Accepted May 29, 2020;
    Published June 18, 2020
  • Author(s)
  • DOI
    http://dx.doi.org/10.21511/imfi.17(2).2020.17
  • Article Info
    Volume 17 2020, Issue #2, pp. 216-230
  • TO CITE АНОТАЦІЯ
  • Cited by
    5 articles
  • 1246 Views
  • 124 Downloads

Creative Commons License
This work is licensed under a Creative Commons Attribution 4.0 International License

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.

view full abstract hide full abstract
    • Figure 1. The response of key macro variables to public spending shock
    • Figure 2. The response of the output and public debt to public spending shock: sensitivity to parameter ρB
    • Table 1. Calibrated parameters
    • Conceptualization
      Serhii Shvets
    • Data curation
      Serhii Shvets
    • Formal Analysis
      Serhii Shvets
    • Funding acquisition
      Serhii Shvets
    • Investigation
      Serhii Shvets
    • Methodology
      Serhii Shvets
    • Project administration
      Serhii Shvets
    • Resources
      Serhii Shvets
    • Software
      Serhii Shvets
    • Validation
      Serhii Shvets
    • Visualization
      Serhii Shvets
    • Writing – original draft
      Serhii Shvets
    • Writing – review & editing
      Serhii Shvets