Evidence for the German Debt Brake

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,[email protected]‐mannheim.de.