Fiscal Policy Rules in Practice

Fiscal Policy Rules in Practice*

Andreas Thams^

Institut für Statistik und Okonometrie, Freie Universitat Berlin
Boltzmannstr. 20, 14195 Berlin, Germany, [email protected]

Abstract

This paper analyzes German and Spanish fiscal policy using simple policy rules. We
choose Germany and Spain, as both are Member States in the European Monetary Union
(EMU) and underwent considerable increases in public debt in the early 1990s. We focus on
the question, how fiscal policy behaves under rising public debt ratios. It is found that both
Germany and Spain generally exhibit a positive relationship between government revenues
and debt. Using Markov-switching techniques, we show that both countries underwent a
change in policy behavior in the light of rising debt/output ratios at the end of the 1990s.
Interestingly, this change in policy behavior differs in its characteristics across the two
countries and seems to be non-permanent in the case of Germany.

Keywords: Fiscal policy rules, public debt, euro area, fiscal consolidation

JEL classification: E62, E63, E65

*This research was supported by the Deutsche Forschungsgemeinschaft through the SFB 649 “Economic Risk”.

^I am grateful to Jürgen Wolters, Imke Brüggemann and Georg Zachmann for their help and comments. All
remaining errors are mine, of course.

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