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

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  • Christine Olivia Strong

    (Old Dominion University)

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.

Suggested Citation

  • Christine Olivia Strong, 2023. "The impact of fiscal rules on government debt: evidence from the CFA zone," Empirical Economics, Springer, vol. 65(5), pages 2357-2391, November.
    • Handle: RePEc:spr:empeco:v:65:y:2023:i:5:d:10.1007_s00181-023-02430-w
    DOI: 10.1007/s00181-023-02430-w
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    4. Bao, Fengnai & Chen, Binger & Chen, Di, 2024. "The impact of local government financing vehicles debt on corporate risk-taking: Evidence from China," Finance Research Letters, Elsevier, vol. 60(C).

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    More about this item

    Keywords

    Fiscal rules; Currency union; Government debt; CFA zone;
    All these keywords.

    JEL classification:

    • C01 - Mathematical and Quantitative Methods - - General - - - Econometrics
    • E02 - Macroeconomics and Monetary Economics - - General - - - Institutions and the Macroeconomy
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt
    • O11 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development

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