Abstract
SummaryThe Swiss fiscal rule or “debt brake” is applied to simulated data of economic output and fiscal revenues. The budget remains almost perfectly balanced and the debt ratio stable over the medium and long term: The cyclical adjustment of the debt brake is effective in terms of its primary objective of achieving a balanced budget over the medium term. The rule also performs well with respect to the objective of taking into account the position of the economy in the cycle. In the case of a non-stationary GDP series, however, this result can not be guaranteed anymore.
Highlights
The Swiss fiscal rule at the Federal level, known as the “debt brake” is an interesting representative of its kind in many aspects
In order to contribute to a clarification the present paper focuses on a technical design property of the debt brake, namely the implications of the measurement of the output gap that is applied by Swiss fiscal policy authorities when implementing the fiscal rule
The fluctuations are more pronounced in the case of the random walk. This outcome is compatible with the target value of the Swiss federal fiscal rule, which requires a nominally balanced budget in the medium term
Summary
The Swiss fiscal rule at the Federal level, known as the “debt brake” is an interesting representative of its kind in many aspects. The mechanism of the fiscal rule aims at financing expenditures through current revenues instead of new debt. The relevant question should be whether a balanced budget can be attained within an acceptable range or if there are some systematic biases toward either deficits or surpluses To answer this question, the adjustment account, which is an important feature of the debt brake that allows ex post corrections, should be given proper attention. The present paper simulates the behaviour of the debt brake applied to a modelled output series using a Monte Carlo approach and tests whether budget balance is achieved in the medium term and whether debt remains within fixed limits.
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