TY  - JOUR
AU  - Bassetto,Marco
AU  - Lepetyuk,Vadym
TI  - Government Investment and the European Stability and Growth Pact
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 13200
PY  - 2007
Y2  - June 2007
UR  - http://www.nber.org/papers/w13200
L1  - http://www.nber.org/papers/w13200.pdf
N1  - Author contact info:
Marco Bassetto
Research Department
Federal Reserve Bank of Chicago
230 S. LaSalle Street
Chicago, IL 60604
Tel: 312/322-5909
Fax: 312/322-2357
E-Mail: mbassetto@frbchi.org

Vadym Lepetyuk
Department of Economics, University of Minnesota
271 19th Ave S
Minneapolis, MN 55455
E-Mail: lepetyuk@econ.umn.edu
AB  - We consider the effect of excluding government investment from the deficit subject to the limits of the European Stability and Growth Pact. In the model we consider, residents of a given country discount future costs and benefits of government spending more than efficiency would dictate, because they fail to take into account the portion that will accrue to people that have not yet been born or immigrated into the country. It is thus in principle desirable to design budget rules that favor long-term investment (by allowing more borrowing) over other government spending that only carries short-term benefits. However, given the low rates of population growth, mortality, and mobility across European countries, we find that the distortions arising from treating all government spending equally are likely to be modest. We also show that these modest distortions can be alleviated only if net government investment is excluded from the deficit computation; excluding gross investment may even be counterproductive, as it promotes overspending in government capital.
ER  -