Debt financing of public investment: On a popular misinterpretation of “the golden rule of public sector borrowing” |
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Authors: | Kersten Kellermann |
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Institution: | aCentre of Public Finance, University of Fribourg, Pérolles 90, 1700 Fribourg, Switzerland |
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Abstract: | In this paper I challenge the proposition that the golden rule of public sector borrowing is consistent with the principle of intertemporal allocative efficiency, in the sense that growth-enhancing public investment justifies a structural public deficit. I demonstrate that in the long run the social opportunity cost of debt-financed public investment exceeds the social opportunity cost of tax financed public investments. This result holds if the social rate of time preference is lower than the interest rate on government borrowing. Thus a benevolent government would use taxes to finance public investment. In the short run, debt financing is justified if public investment has a considerable growth effect on private consumption. This requires a corresponding initial undersupply of public capital. |
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Keywords: | Public investment Public borrowing Golden rule Budget rules Stability and Growth Pact |
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