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Empirical Economics

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30-06-2023

The impact of fiscal rules on government debt: evidence from the CFA zone

Author: Christine Olivia Strong

Published in: Empirical Economics | Issue 5/2023

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Abstract

This paper uses the difference-in-differences method and the synthetic control method (SCM) to estimate the effect of adopting numerical fiscal rules on the debt-to-GDP ratio of CFA zone countries. Using the SCM addresses the self-selection bias issue that has plagued previous studies on the impact of fiscal rules. The SCM compares the post-treatment trajectory of the treated CFA zone countries to that of a counterfactual constructed using similar but untreated donor countries. Our results show that, overall, adopting a stringent numerical debt rule is associated with a statistically significant decrease in the level of debt for CFA zone countries. The effect is stronger for West African CFA zone countries, suggesting that enforcement mechanisms and strong institutions are the key determinants of the de facto effectiveness of fiscal rules.

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Source: World Bank Economic Prospect.

Source: China Africa Research Initiative.

The CFA zone is the second-largest currency union in the world, which consists of two different zones: The West African zone (WAEMU) and the Central African zone (CAEMC). We provide more details about the zone in Sect. 3 of the paper.

WAEMU stands for West African Economic and Monetary Union. CAEMC stands for Central African Economic and Monetary Community.

We discuss these issues in detail in Sect. 5.

BEAC stands for Banque des Etats de l’Afrique Centrale in French.

BCEAO stands for Banque Centrale des Etats de l’Afrique de l’Ouest in French.

This used to be the case for BCEAO as well, but since 2020, there are no longer any French representatives on its board of directors.

Source: The World Bank.

Before the devaluation, 1 French franc = 50 francs CFA but after the devaluation, 1 French franc = 100 francs CFA.

Source: IMF.

To test this, we simply regress each of the covariates described above on our treatment, and our analysis shows that there is a statistically significant relationship between these variables and our treatment.

We also perform a more standard DID regression where all treated units are included as a treated group for each zone. Results are similar to the individual effects and are available upon request.

Note that these characteristics may include the pre-intervention values of the outcome variable as well.

See Abadie et al. (2010).

Either prior to or the same year that CFA zone countries adopted a debt rule. Examples include countries such as Kenya which adopted a debt rule in 1997 and Namibia, in 2001.

In the Appendix, Tables 8 and 9 report the countries included in the counterfactual for each country as well as their weights.

EAMU countries adopted a debt rule in 2013 and although the post-treatment period is less than 10 years, we test for the effect of adopting this rule on government debt for our 4 countries. The result was statistically significant for Rwanda only. Results are available upon request.

We thank an anonymous referee for making this suggestion.

7 of our donor countries do not have enough data, reducing our number of donor countries to 20.

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Title: The impact of fiscal rules on government debt: evidence from the CFA zone
Author: Christine Olivia Strong
Publication date: 30-06-2023
Publisher: Springer Berlin Heidelberg
Published in: Empirical Economics / Issue 5/2023
Print ISSN: 0377-7332
Electronic ISSN: 1435-8921
DOI: https://doi.org/10.1007/s00181-023-02430-w

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