Original sin: Fiscal rules and government debt in foreign currency in developing countries

Ablam Estel Apeti, Bao-We-Wal Bambe, Jean-Louis Combes and Eyah Denise Edoh

Journal of Macroeconomics, 2024, vol. 80, issue C

Abstract: Developing economies often borrow abroad in foreign currency, which exposes them to the problem of “original sin.” Although the literature on the issue is relatively extensive, there is limited discussion about the role of fiscal frameworks, such as fiscal rules, in addressing original sin. Using a panel of 59 developing countries from 1990-2020 and applying the entropy balancing method, this study reveals that fiscal rules play a crucial role in reducing government debt in foreign currency, and that the effects are statistically and economically significant and robust. Furthermore, we find that the effectiveness of fiscal rules in curbing original sin is enhanced by factors such as the strengthening of the rule itself, improved fiscal discipline before the reform’s adoption, financial development, financial openness, exchange rate flexibility, the level of economic development, and sound institutions. Finally, transmission channels analysis reveals that the effect of fiscal rules on original sin is driven by fiscal and monetary policy credibility.

Keywords: Fiscal rules; Original sin; Developing countries; Entropy balancing (search for similar items in EconPapers)
JEL-codes: F34 F41 G15 H63 (search for similar items in EconPapers)
Date: 2024
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Working Paper: Original Sin: Fiscal Rules and Government Debt in Foreign Currency in Developing Countries (2023)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jmacro:v:80:y:2024:i:c:s0164070424000156

DOI: 10.1016/j.jmacro.2024.103600

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