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

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.