The Debt Brake: Business Cycle and Welfare Consequences of Germany's New Fiscal Policy Rule

72 Pages Posted: 8 Jun 2016

See all articles by Eric Mayer

Eric Mayer

University of Würzburg - Institute of Economics and Social Sciences

Nikolai Stahler

Deutsche Bundesbank - Economics Department

Date Written: 2009

Abstract

In a New Keynesian DSGE model with non-Ricardian consumers, we show that automatic stabilization according to a countercyclical spending rule following the idea of the debt brake is well suited both to steer the economy and in terms of welfare. In particular, the adjustment account set up to record public deficits and surpluses serves well to keep the level of government debt stable. However, it is essential to design its feedback to government spending correctly, where discretionary lapses should be corrected faster than lapses due to estimation errors.

Keywords: Fiscal policy, debt brake, welfare, dsge

JEL Classification: E32, G00, E62

Suggested Citation

Mayer, Eric and Stahler, Nikolai, The Debt Brake: Business Cycle and Welfare Consequences of Germany's New Fiscal Policy Rule (2009). Bundesbank Series 1 Discussion Paper No. 2009,24, Available at SSRN: https://ssrn.com/abstract=2785353 or http://dx.doi.org/10.2139/ssrn.2785353

Eric Mayer (Contact Author)

University of Würzburg - Institute of Economics and Social Sciences ( email )

Sanderring 2
Wuerzburg, 97070
Germany

Nikolai Stahler

Deutsche Bundesbank - Economics Department ( email )

Wilhelm-Epstein-Strasse 14
60431 Frankfurt am Main
Germany

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