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
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Ablam Estel Apeti: LEO - Laboratoire d'Économie d'Orleans [2022-...] - UO - Université d'Orléans - UT - Université de Tours - UCA - Université Clermont Auvergne, EconomiX - EconomiX - UPN - Université Paris Nanterre - CNRS - Centre National de la Recherche Scientifique
Bao We Wal Bambe: LEO - Laboratoire d'Économie d'Orleans [2022-...] - UO - Université d'Orléans - UT - Université de Tours - UCA - Université Clermont Auvergne
Jean-Louis Combes: LEO - Laboratoire d'Économie d'Orleans [2022-...] - UO - Université d'Orléans - UT - Université de Tours - UCA - Université Clermont Auvergne
Eyah Denise Edoh: LEO - Laboratoire d'Économie d'Orleans [2022-...] - UO - Université d'Orléans - UT - Université de Tours - UCA - Université Clermont Auvergne

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Abstract: 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.

Keywords: Original sin; Developing countries; Entropy balancing (search for similar items in EconPapers)
Date: 2024-06
Note: View the original document on HAL open archive server: https://hal.science/hal-04130477v2
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Published in Journal of Macroeconomics, 2024, 80, pp.103600. ⟨10.1016/j.jmacro.2024.103600⟩

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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-04130477

DOI: 10.1016/j.jmacro.2024.103600

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