The paper discusses moral hazard problems as a potential reason for the observed strong increase of indebtedness of German states (Länder). Indeed, financial markets do not react much to the strong differences in fiscal fundamentals of German Länder. Using a case study, the paper also shows...

This article examines the extent to which subnational governments may drive sovereign risk premiums. Is subnational fiscal policy affecting the interest rates on central government bonds? Furthermore, we focus on a number of causal mechanisms that may mitigate or reinforce these upstream...

Based on a synthetic literature review, the present article summarizes the main characteristics of the Eurozone institutional setup and the related economic and political incentives that drive Eurozone governments to increase their public debts, disregarding the limits agreed in the European...

This paper analyzes the introduction of an automatic correction mechanism (ACM) in an economic union whose member states expect to be bailed out in the case of a debt crisis. An ACM can be used to penalize governments that run deficits. We show that if the mechanism is appropriately structured,...

This article examines effectiveness of sub-national borrowing control regimes in maintaining overall fiscal sustainability. The results suggest that regulating sub-national borrowing based on fiscal rules performs most efficiently in maintaining fiscal consolidation. Furthermore, sole reliance...

In 2009, Germany introduced a new debt rule in its federal constitution (Grundgesetz). The socalled 'debt brake' prescribes a balanced budget for both the federal level and the states. However, the states have leeway regarding transposition and specification of the national requirements into...

The present paper summarizes the main characteristics of the Eurozone institutional setup and the related economic and political incentives that drive Eurozone governments to increase their public debts, disregarding the limits agreed in the European treatises. The first part of the paper...

Fiscal federalism in Germany is characterized by lacking sub-national tax autonomy and intensive fiscal equalization. Due to a sunset clause, the current equalization system has to be renegotiated by the year 2019. Against this backdrop, this contribution studies the reform preferences of...

Federal states in Germany are characterized by low fiscal autonomy. Equalization systems in place balance revenue differences to a considerable extent and states cannot independently set taxes of any major relevance. Although these features of German federalism are notorious for their...

Standard models of soft budget constraints consider bailouts as pure monetary transfers. However, in practice often additional obligations or restrictions, such as savings goals, are linked to monetary bailouts. This paper analyzes in a model of a federation if such restrictions change economic...