Bao-We-Wal BAMBE

Most developing economies borrow abroad in foreign currency, which exposes them to the problem of "original sin." Although the literature on the issue is relatively extensive, little is said about the role of fiscal frameworks such as fiscal rules in controlling original sin. Hence, using a panel of 59 developing countries over the period 1990-2020 and applying the entropy balancing method, we find that fiscal rules reduce government debt in foreign currency, and that the effects are statistically and economically significant and robust. In addition, the strengthening of the rule, better fiscal discipline prior to the adoption of the reform, financial development, financial openness, flexibility of the exchange rate regime, and sound institutions amplify the negative effect of fiscal rules on original sin.

We ask whether fiscal rules improve public expenditure efficiency. That is, after computing efficiency scores for a panel of 159 countries of all income levels over the period 1990-2017, we apply the entropy balancing method to assess the effect of fiscal rules on the scores obtained, thus mitigating selection bias. Evidence suggests that implementing a fiscal rule significantly increases expenditure efficiency, with economically significant effects. Robustness was checked using a range of economic and econometric tests. Moreover, we show that our findings are neither driven by a spurious trend, nor by confounding factors, nor are they confounded by the effects of other reforms such as inflation targeting, IMF programs or fiscal consolidation episodes. Finally, further analysis suggests that the effect of fiscal rules on public expenditure efficiency is subject to some heterogeneity, depending on the types of rules, their design, macroeconomic factors as well as time elapsed since the reform adoption.

We ask whether fiscal rules improve public expenditure efficiency. That is, after computing efficiency scores for a panel of 159 countries of all income levels over the period 1990-2017, we apply the entropy balancing method to assess the effect of fiscal rules on the scores obtained, thus mitigating selection bias. Evidence suggests that implementing a fiscal rule significantly increases expenditure efficiency, with economically significant effects. Robustness was checked using a range of economic and econometric tests. Moreover, we show that our findings are neither driven by a spurious trend, nor by confounding factors, nor are they confounded by the effects of other reforms such as inflation targeting, IMF programs or fiscal consolidation episodes. Finally, further analysis suggests that the effect of fiscal rules on public expenditure efficiency is subject to some heterogeneity, depending on the types of rules, their design, macroeconomic factors as well as time elapsed since the reform adoption.