A note on the link between NPLs and stock-flow adjustments in 69 countries

Christos Chrysanthakopoulos and Athanasios O. Tagkalakis

Journal of Economic Studies, 2025, vol. 53, issue 2, 283-296

Abstract: PurposeThe Global Financial Crisis has heightened policymakers' focus on understanding how rising non-performing loans affect fiscal policy, particularly through their effect on stock-flow adjustments. Consequently, there is a growing interest in exploring the interaction between financial instability and public debt dynamics. This research is especially significant as it unveils a new connection between financial sector vulnerabilities and the sustainability of public debt.Design/methodology/approachUsing panel data from 69 countries (2008–2020) and applying the Jordà (2005) local projection methodology.FindingsWe find that increasing NPL ratios lead to a significant increase in stock-flow adjustment (SFAs) over the medium-term. This reflects the build-up of public debt that cannot be directly attributed to budget deficits but is due to government measures to prop up a troubled bank or banking system.Originality/valueOur analysis examines for the first time in the literature the dynamic response of SFAs to increases in NPLs over a medium-term horizon.

Keywords: NPLs; Stock-flow adjustments; Local projections (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eme:jespps:jes-01-2025-0017

DOI: 10.1108/JES-01-2025-0017

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