Golden rule

Updated: Aug 20, 2021

1. (in economic theory) In an overlapping generations model, the relationship between the capital-labour ratio, k, and the population growth rate, n, that maximizes consumption per capita:f’(k) = n, where f’ denotes output per unit of labour as a function of the capital-labour ratio, and hence f’(k) is the marginal product of capital. In a competitive economy it equals the interest rate, r, so that an alternative formulation of the golden rule is r = n.

2. (in British politics) The rule implemented from 1997 by HM Treasury under Gordon Brown that the government could borrow only to invest, and that the current budget must balance over the economic cycle. Economic difficulties in 2005 meant that the golden rule would be breached so the government altered the start date of the cycle from 1999 to 1997. The end date of the cycle was changed for the same reason in 2008. These changes undermined the credibility of the rule which is no longer prominent in policy-making.

Reference: Oxford Press Dictonary of Economics, 5th edt.

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