The Golden Rule and the Economic Cycles

Author/Editor:

Keiko Honjo

Publication Date:

August 1, 2007

Electronic Access:

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Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary:

The present formulation of the golden rule in the United Kingdom allows fiscal performance to be tested explicitly on an ex-post basis. However, it requires precise dating of the economic cycle, which can lead to significant controversy. Also, the need to aim for current balance or better "over the cycle" may force fiscal policy to be procyclical toward the end of cycles. Using dynamic stochastic simulations, the paper suggests that making the formulation of the golden rule forward-looking and independent of the dating of the economic cycle would reduce the risk of procyclicality and enhance macroeconomic stability.

Series:

Working Paper No. 2007/199

Subject:

Automatic stabilizers Fiscal policy Fiscal stance Procyclical fiscal policy Public debt

English

Publication Date:

August 1, 2007

ISBN/ISSN:

9781451867633/1018-5941

Stock No:

WPIEA2007199

Pages:

23

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