Bao-We-Wal BAMBE

Does inflation targeting foster private domestic investment in developing countries? A few studies have attempted to examine this issue, with mixed results. Here we argue that by anchoring public expectations firmly, the inflation targeting framework should enhance monetary policy credibility and macroeconomic stability, thereby promoting investment incentives. Using data from 62 countries over the period 1990-2019 and applying propensity score matching methods, we find that inflation targeting significantly increases domestic investment. However, inflation deviations from the target reduce the favorable effect of inflation targeting on investment. Furthermore, the positive effect of inflation targeting on investment is amplified in emerging economies and in countries with sound fiscal discipline. Finally, we explore the underlying mechanisms and show that macroeconomic stability, i.e., the reduction in inflation and its volatility, interest rate, exchange rate, and output volatility, is the main channel through which the monetary framework promotes domestic investment.

This article provides a large dataset on PSE using a parametric approach, and covering 158 countries of all income levels, over the period 1990–2017. The analysis includes four sectors: education, health, infrastructure, and public administration. We further consider three efficiency indicators regarding the ‘Musgravian’ tasks for government: allocation, distribution, and stabilization. After computing the efficiency scores for our sample countries, we examine their determinants using a wide range of economic and institutional factors. Our key findings are that trade globalization, factor productivity, and institutional quality seem to be important determinants of total PSE. The results remain robust to alternative specifications and methods. Finally, we provide additional evidence by exploring the sensitivity of the main determinants to different country groups, considering the level of economic development, geographical regions, and fragile states.

We examine the effect of media freedom on public expenditure efficiency, using a panel of 158 advanced and developing countries from 1994 to 2016. We find robust evidence that media freedom significantly improves government efficiency, and the effect is strongly complementary to per capita income, level of education, Internet access, and fiscal rules. We further empirically examine the underlying mechanisms and show that the effect of media freedom on efficiency is mainly channeled through reduced corruption, improved transparency and accountability in the public sector, and enhanced electoral competition. These findings underscore the critical role of media freedom in fostering good governance and efficient resource use.

DR LEO - Working paper 2022-05

We investigate the impact of climate change on firms’ investment in research and development (R&D) in developing countries. The paper relies on two contrasting hypotheses. In the first hypothesis, we speculate an optimistic situation where climate change could induce firms to spend on R&D to both reduce their environmental impact and curb the effects of future climate shocks. In the second hypothesis, we propose a pessimistic scenario where climate change would reduce firms’ incentives to invest in R&D. This second hypothesis would mainly be due to tighter conditions for access to finance from lenders, given the increased uncertainty about the firm’s future returns in the face of climate change. The empirical results support the second scenario, small firms being more severely affected. Furthermore, we examine the underlying mechanisms and identify financial access as the key channel through which climate change reduces R&D investment.

This paper analyses the effect of inflation targeting on private domestic investment in developing countries. Using the propensity scores matching method, which allows addressing the self-selection bias in the policy adoption, I find that inflation targeting has increased private domestic investment from 2.05 to 2.53 percentage points in targeting countries compared to nontargeting countries. The estimated coefficients are economically meaningful and robust to a battery of econometric tests and alternative specifications. Finally, I highlight several heterogeneities in the effect of inflation targeting, depending on various factors.

We ask whether fiscal rules improve public expenditure efficiency. That is, after computing efficiency scores for a panel of 159 countries of all income levels over the period 1990-2017, we apply the entropy balancing method to assess the effect of fiscal rules on the scores obtained, thus mitigating selection bias. Evidence suggests that implementing a fiscal rule significantly increases expenditure efficiency, with economically significant effects. Robustness was checked using a range of economic and econometric tests. Moreover, we show that our findings are neither driven by a spurious trend, nor by confounding factors, nor are they confounded by the effects of other reforms such as inflation targeting, IMF programs or fiscal consolidation episodes. Finally, further analysis suggests that the effect of fiscal rules on public expenditure efficiency is subject to some heterogeneity, depending on the types of rules, their design, macroeconomic factors as well as time elapsed since the reform adoption.