Research

(Un-)intended Effects of Fiscal Rules

European Journal of Political Economy 52, 2018, 166–191

with Lars P. Feld

Revised version of: Effects of Fiscal Rules: 85 Year's Experience in Switzerland, CESifo Working Paper Series No. 6063, Munich, 2016

The paper investigates the fiscal effects of Swiss cantonal debt brakes by taking explicitly into account the rules’ coverage. An in-depth analysis provides unique evidence that suggests the following: First, fiscal rules reduce public deficits. The effect is stronger the better the analyzed budget position corresponds with the variable targeted by the rules. Second, cantonal debt brakes exhibit some unintended effects, i.e., an evasion into unconstrained accounts, emphasizing the importance of constraining all accounts. Third, the existence of political budget cycles depends on the institutional context, i.e., the timing of elections and the presence of debt brakes. Fifth, cantonal debt brakes dampen the fiscal deterioration during unexpected deficit shocks by more rapid fiscal adjustments.

Media Coverage: WirtschaftsWoche

Vertical Effects of Fiscal Rules: The Swiss Experience

International Tax and Public Finance 25, 2018, 673–721

with LARS P. FELD

Revised version of: Vertical Effects of Fiscal Rules: The Swiss Experience, CESifo Working Paper Series No. 5043, Munich, 2014

Formal fiscal rules have been introduced in many countries throughout the world. While most studies focus on the intra-jurisdictional effects of fiscal rules, vertical effects on the finances of other levels of government have yet to be explored thoroughly. From a theoretical point of view, vertical effects could work in opposite directions, i.e., improve and burden other levels’ finances. This paper is the first formally investigating the influence of Swiss debt brakes, which primarily target the cantonal level, on municipal finances. A difference-in-differences estimation (two-way fixed effects) of aggregated and disaggregated local panel data provides unique evidence that suggests little effect of budget constraints at the cantonal level on average municipal finances and fiscal decentralization. The results are confirmed by a wide range of robustness tests. If anything, cantonal debt brakes are associated with improved local finances and fiscal centralization. These findings run counter to popular fears and emphasize the possibility of positive spillover effects of fiscal rules.

Fiscal Sustainability of the German Laender: Time Series Evidence

Finanzarchiv / Public Finance Analysis 73(1), 2017 103–132

with LARS P. FELD and EKKEHARD A. KÖHLER

Revised version of: Fiscal Sustainability of the German Laender: Time Series Evidence, CESifo Working Paper Series No. 4928, Munich, 2014

We analyze the sustainability of public finances in the 16 states (Länder) of the Federal Republic of Germany, using an unprecedentedly comprehensive fiscal data set covering the period from 1950 to 2011 for West German Länder and from 1991 to 2011 for East German Länder. We extend the existing literature in that we apply unit-root and stationarity tests not only to debt but also to expenditure and revenue and explore their long-run relation in cointegration analyses for each Land. The results provide evidence against strict fiscal sustainability in a majority of German Länder. A notable exception to this finding is Bavaria.

(Un-)Sustainability of Public Finances in German Laender: A Panel Time Series Approach

Economic Modelling 53, 2016, 254–265

with LARS P. FELD and EKKEHARD A. KÖHLER

Revised version of: Panel Cointegration Tests on the Fiscal Sustainability of German Laender, CESifo Working Paper Series No. 4929, Munich, 2014

This paper provides evidence that most German states (Laender) have unsustainable public finances by exploiting a newly compiled database covering the years 1950–2011. Although the Laender are closely intertwined we are the first to apply “second generation” panel techniques that control for correlation among the Laender. A unique identification strategy for the selection of relevant sub-panels improves the robustness of the tests.

Sustainability of Public Debt in Germany: Historical Considerations and Time Series Evidence for the Period 1850–2010

Jahrbücher für Nationalökonomie und Statistik / Journal of Economics and Statistics 233(3), 2013, 291–335

with LARS P. FELD and EKKEHARD A. KÖHLER

Revised version of: Sustainability of German Fiscal Policy and Public Debt: Historical and Time Series Evidence for the Period 1850–2010, CESifo Working Paper Series No. 1435, Munich, 2013

We analyse German public finances against a theoretical background using a unique database, retrieved frommultiple sources covering the period between 1850 and 2010.Multiple currency crises and force majeure offer anecdotal evidence contradicting the historical perception of Germany being the poster child of European public finance. Given these corresponding breaks in time series, the empirical analysis is conducted for the sub-periods 1872-1913 and 1950-2010. In addition to anecdotal historical analysis, we conduct formal tests on fiscal sustainability, including tests on stationarity and cointegration and the estimation of Vector Autoregression (VAR) and Vector Error Correction Models (VECM). While we cannot reject the hypothesis that fiscal policy was sustainable in the period before the First World War, the tests allow for a rejection of the hypothesis of fiscal sustainability for the period from 1950 to 2010. This evidence leads to the conclusion that Germany’s public debt is in dire need of consolidation. Albeit constituting a much needed reform to this development, the incompleteness of the German debt brake and fiscal federalismwill have to be addressed in the coming years, in order to ensure that fiscal consolidation actually takes place – for the sake of public debt sustainability.

Media coverage: Frankfurter Allgemeine Zeitung (FAZ)

Fiscal Institutions in Germany

Schweizerische Zeitschrift für Volkswirtschaft und Statistik / Swiss Journal of Economics and Statistics 149(2), 2013, 249–290

with LARS P. FELD

In 2009 Germany introduced a new fiscal rule in its Basic Law. It stipulates that the federal budget must be (structurally) close to balance from 2016 onwards and does not allow for (structural) budget deficits in the Laender (states’) budgets after 2019. While the already existing debt brakes at the Laender level have relatively wide loopholes, six states do not even seriously consider the introduction of new fiscal rules. In fact, only 9 of the 16 Laender as well as the federal level passed binding consolidation plans. Despite historically high revenues in 2011, most states ran deficits and increased public debt. In this paper, we analyze the German debt brakes at the federal and the Laender levels and assess the probability that the German jurisdictions manage to comply with the constitutional requirements of its debt brake.

Die deutsche Schuldenbremse als Allheilmittel? Eine Analyse im historischen Kontext

Journal für Generationengerechtigkeit / Intergenerational Justice Review 13(2), 2013, 48–65

In der Finanz- und Schuldenkrise ist die Insolvenzgefahr für Staaten evident geworden. Die drohende Zahlungsunfähigkeit resultiert dabei aus den mit der Staatsverschuldung steigenden Zins- und Tilgungsverpflichtungen. Diese verkleinern den finanzpolitischen Handlungsspielraum zukünftiger Generationen. Der Trend einer zunehmenden Staatsverschuldung ist nicht nur durch rein ökonomische Faktoren zu erklären, auch politökonomische Verschuldungsanreize sind von Bedeutung. Zur Eindämmung dieser Anreize wurde 2009 die Einführung der deutschen Schuldenbremse beschlossen. Eine Analyse der Verschuldungsrestriktionen seit 1871 zeigt, dass die neue deutsche Schuldenbremse die wesentlichen Ausgestaltungsprobleme der alten Regelungen minimiert. Allerdings beeinträchtigt die mangelnde finanzpolitische Eigenverantwortlichkeit der Gebietskörperschaften die politökonomischen Anreize zur Einhaltung der Schuldenbremse und damit zu einer tragfähigen Finanzpolitik.