(Un-)intended effects of fiscal rules

Abstract

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.