Assessing the fiscal implications of the development of the banking sector. Evidence from OECD countries

Ionel Leonida, Cosmin – Octavian Cepoi, Bogdan – Andrei Dumitrescu (), Carmen Obreja and Andrei Stanculescu
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Ionel Leonida: "Victor Slăvescu" Centre for Financial and Monetary Research, Romanian Academy, Bucharest
Cosmin – Octavian Cepoi: "Victor Slăvescu" Centre for Financial and Monetary Research, Romanian Academy, Bucharest
Bogdan – Andrei Dumitrescu: "Victor Slăvescu" Centre for Financial and Monetary Research, Romanian Academy, Bucharest Department of Money and Banking, Faculty of Finance and Banking, Bucharest University of Economic Studies
Carmen Obreja: Department of Money and Banking, Faculty of Finance and Banking, Bucharest University of Economic Studies

Journal for Economic Forecasting, 2024, issue 2, 22-31

Abstract: In this study, we examine the connection between fiscal policy and banking activity. Over recent decades, the budget balance, a key fiscal indicator, has faced deterioration, prompting concerns about the factors influencing its fluctuations. We investigate this relationship by analyzing fiscal and monetary variables, including public debt, inflation, foreign direct investments, remittances, and bank credit, across 34 OECD countries from 2005 to 2020. Employing a Panel Smooth Transition Regression (PSTR) model, our findings reveal that the budget deficit responds to banking profitability, measured by Return on Assets, and a country's banking system's probability of default (Z-Score). The impact varies based on the preceding year's public debt level, with higher sensitivity observed in heavily indebted countries.

Keywords: Budget Deficit; Public Debt; COVID-19; Smooth Transition; OECD countries (search for similar items in EconPapers)
JEL-codes: C58 H30 (search for similar items in EconPapers)
Date: 2024
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