Evaluating the Effects of the German Debt Brake: A Synthetic Control Approach

Maximilian Langer, Joshua Hassib, Lars Feld and Daniel Nientiedt

No 119333, CESifo Working Paper Series from CESifo

Abstract: This paper assesses the effectiveness and public finance implications of the German debt brake, a constitutional balanced budget rule introduced in 2009 that aims to ensure a sustainable path of public indebtedness. In order to estimate its causal effects, our paper employs a synthetic control strategy: We compare the counterfactual developments of six relevant outcome variables in a synthetic Germany without this rule to their actual developments. Overall, our empirical analysis suggests that the debt brake bears the main responsibility for the consolidation of German public finances during the 2010s. By reducing the deficit, the debt brake in all likelihood also reduced financing costs, though this effect cannot be solely attributed to it. Furthermore, our analysis finds that the debt brake did not negatively and robustly impact public investment, at least on the federal level. The results are supported by a variety of significance and robustness tests.

Keywords: fiscal rules; fiscal federalism; german debt brake; policy evaluation; synthetic control method (search for similar items in EconPapers)
JEL-codes: C13 C53 D78 H60 H63 H77 (search for similar items in EconPapers)
Date: 2025
New Economics Papers: this item is included in nep-eec and nep-eur
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