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.
This is a preview of subscription content, log in via an institution to check access.
Similar content being viewed by others
Notes
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.
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.
References
Abadie A (2019) Using synthetic controls: feasibility, data requirements, and methodological aspects. J Econ Lit 59:391–425
Abadie A, Gardeazabal J (2003) The economic costs of conflict: a case study of the Basque Country. Am Econ Rev 93(1):113–132
Abadie A, Diamond A, Hainmueller J (2010) Synthetic control methods for comparative case studies: estimating the effect of California’s tobacco control program. J Am Stat Assoc 105(490):493–505
Abadie A, Diamond A, Hainmueller J (2015) Comparative politics and the synthetic control method. Am J Political Sci 59(2):495–510
Acemoglu D, Johnson S, Robinson JA (2001) The colonial origins of comparative development: an empirical investigation. Am Econ Rev 91(5):1369–1401
Alt JE, Lassen DD (2006) Fiscal transparency, political parties, and debt in OECD countries. Eur Econ Rev 50(6):1403–1439
Arkhangelsky D, Imbens GW (2022) Doubly robust identification for causal panel data models. Econom J 25(3):649–674
Bleaney M, Ozkan FG (2011) The structure of public debt and the choice of exchange rate regime. Can J Econ/rev Can D’economie 44(1):325–339
Block SA (2002) Political business cycles, democratization, and economic reform: the case of Africa. J Dev Econ 67(1):205–228
Bohn H, Inman RP (1996) Balanced-budget rules and public deficits: evidence from the US states. In: Carnegie-Rochester conference series on public policy, vol 45. North-Holland, pp 13–76
Bove V, Elia L, Smith RP (2014) The relationship between panel and synthetic control of the effect of civil war
Brender A, Drazen A (2005) Political budget cycles in new versus established democracies. J Monet Econ 52(7):1271–1295
Caetano C, Callaway B, Payne S, Rodrigues HSA (2022) Difference in differences with time-varying covariates. arXiv preprint arXiv:2202.02903
Canova F, Pappa E (2006) The elusive costs and the immaterial gains of fiscal constraints. J Public Econ 90(8–9):1391–1414
Debrun X, Masson P, Pattillo C (2005) Monetary union in west Africa: Who might gain, who might lose, and why? Can J Econ 38(2):454–481
Eichengreen B, Bayoumi T (1994) The political economy of fiscal restrictions: implications for Europe from the United States. Eur Econ Rev 38(3–4):783–791
Eslava M (2011) The political economy of fiscal deficits: a survey. J Econ Surv 25(4):645–673
Fatás A, Mihov I (2003a) The case for restricting fiscal policy discretion. Q J Econ 118(4):1419–1447
Fatás A, Mihov I (2003b) On constraining fiscal policy discretion in EMU. Oxf Rev Econ Policy 19(1):112–131
Filc G, Scartascini C (2005) Budget institutions and fiscal outcomes. Int J Public Budg 59:81–138
Galiani S, Quistorff B (2017) The synth_runner package: utilities to automate synthetic control estimation using synth. Stata J 17(4):834–849
Gulde AM, Tsangarides CG (eds) (2008). International Monetary Fund, Washington, DC
Hadjimichael MMT, Galy MM (1997) The CFA franc zone and the EMU. International Monetary Fund
Hallerberg M, Scartascini C, Stein E (2009) The budget process as a political arena. Who Decides the Budget 295–320
Hitaj ME, Onder YK (2013) Fiscal discipline in WAEMU: rules, institutions, and markets (No. 13-216). International Monetary Fund
Kopits MG, Symansky MSA (1998) Fiscal policy rules. International monetary fund.
Kose MA, Kurlat S, Ohnsorge F, Sugawara N (2022) A cross-country database of fiscal space. J Int Money Financ 128:102682
Leiner-Killinger N, Nerlich C (2019) Fiscal rules in the euro area and lessons from other monetary unions. Econ Bull Artic 3
Mandon P (2014) Evaluating treatment effect and causal effect of fiscal rules on procyclicality new assessments on old debate: rules vs. discretion
Nordhaus WD (1975) The political business cycle. Rev Econ Stud 42(2):169–190
Rogoff K (1990) Equilibrium political business cycles. Am Econ Rev 80(1):21–36
Schaechter A, Kinda T, Budina NT, Weber A (2012) Fiscal rules in response to the crisis-toward the next-generation rules: A new dataset. IMF Working Paper. WP/12/187.
Strauss-Kahn MO (2003) Regional currency areas: a few lessons from the experiences of the Eurosystem and the CFA franc zone. BIS Pap 17:42–57
Vegh CA, Vuletin G (2015) How is tax policy conducted over the business cycle? Am Econ J Econ Pol 7(3):327–370
Velasco A (1999) A model of endogenous fiscal deficits and delayed fiscal reforms. Fiscal institutions and fiscal performance. University of Chicago Press, Chicago, pp 37–58
Volkerink B, De Haan J (2001) Fragmented government effects on fiscal policy: new evidence. Public Choice 109(3–4):221–242
Von Hagen J (1991) A note on the empirical effectiveness of formal fiscal restraints. J Public Econ 44(2):199–210
Von Hagen J (2006) Fiscal rules and fiscal performance in the European Union and Japan. Monet Econ Stud 24(1):25–60
Wyplosz C (2012) Fiscal rules: theoretical issues and historical experiences. Fiscal policy after the financial crisis. University of Chicago Press, Chicago, pp 495–525
Funding
No funding was received for this study.
Author information
Authors and Affiliations
Corresponding author
Ethics declarations
Conflict of interest
Christine Strong declares that he/she has no conflict of interest.
Additional information
Publisher's Note
Springer Nature remains neutral with regard to jurisdictional claims in published maps and institutional affiliations.
Appendix
Appendix
See Figs. 4, 5, 6, and 7 and Tables 8 and 9
Removing EAMU countries. Notes Solid lines are government debt for CFA zone countries. The dashed lines represent average government debt for the counterfactual. The vertical line is the intervention year. The p values represent the probabilities that the effect is observed by chance
Removing countries with the highest weights. Notes Solid lines are government debt for CFA zone countries. The dashed lines represent average government debt for the counterfactual. The vertical line is the intervention year. The p values represent the probabilities that the effect is observed by chance
Removing non-African countries. Notes Solid lines are government debt for CFA zone countries. The dashed lines represent average government debt for the counterfactual. The vertical line is the intervention year. The p values represent the probabilities that the effect is observed by chance
Using primary balance as a dependent variable
.
Rights and permissions
Springer Nature or its licensor (e.g. a society or other partner) holds exclusive rights to this article under a publishing agreement with the author(s) or other rightsholder(s); author self-archiving of the accepted manuscript version of this article is solely governed by the terms of such publishing agreement and applicable law.
About this article
Cite this article
Strong, C.O. The impact of fiscal rules on government debt: evidence from the CFA zone. Empir Econ 65, 2357–2391 (2023). https://doi.org/10.1007/s00181-023-02430-w
Received:
Accepted:
Published:
Issue Date:
DOI: https://doi.org/10.1007/s00181-023-02430-w