FiscalRulesandComplianceExpectations‐ EvidencefortheGermanDebtBrake FriedrichHeinemann(ZEWMannheimandUniversityofHeidelberg) EckhardJaneba*(UniversityofMannheim,CESifoandZEW) ChristophSchröder(ZEWMannheim) FrankStreif(ZEWMannheim) May2014 Abstract: Fiscal rules have become popular to limit deficits and high debt burdens in industrializedcountries.Agrowingliteratureexaminestheirimpactbasedonaggregate fiscalperformance.Sofar,noevidenceexistsonhowfiscalrulesinfluencedeficitexpec‐ tations of fiscal policy makers. In the context of the German debt brake, we study this expectationdimension.Inafirststep,weintroduceasimpledynamicmodelinanenvi‐ ronmentcharacterizedbythelaggedimplementationofanewrule.Laggedimplementa‐ tioncharacterizesthesetupoftheGermandebtbrakeandraisescredibilityissues.Ina secondstep,weanalyzeauniquesurveyofmembersofall16Germanstateparliaments andshowthatthedebtbrake’scredibilityisfarfromperfect.Theheterogeneityofcom‐ pliance expectations in the survey closely corresponds to our theoretical predictions regarding states’ initial fiscal conditions, specific state fiscal rules and bailout percep‐ tions.Inaddition,thereisarobustasymmetryincomplianceexpectationsbetweenin‐ sidersandoutsiders(bothforin‐statevsout‐of‐statepoliticiansandthegovernmentvs opposition dimension), which we attribute to overconfidence rather than noisy infor‐ mation.Theseresultssuggestthatnationalfiscalrulescanbestrengthenedthroughno‐ bailoutrules,sustainableinitialfiscalconditionsandcomplementarysub‐nationalrules. JELClassificationCode:H6,H7 Keywords:BudgetDeficits,DebtBrake,Credibility,Survey,FiscalRules Acknowledgement: The authors gratefully acknowledge support from the Collaborative Research Center (SFB) 884 “Political Economy of Reforms”, funded by the German Research Foundation (DFG). *Correspondingauthor: EckhardJaneba,DepartmentofEconomics,UniversityofMannheim,L7,3‐5,68131 Mannheim,Germany,++49‐621‐1811795,janeba@uni‐mannheim.de.