Can fiscal rules improve banking system stability in developing countries?

Yacouba Coulibaly () and Askandarou Cheik Diallo
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Yacouba Coulibaly: LEO - Laboratoire d'Économie d'Orleans [2022-...] - UO - Université d'Orléans - UT - Université de Tours - UCA - Université Clermont Auvergne
Askandarou Cheik Diallo: LEO - Laboratoire d'Économie d'Orleans [2022-...] - UO - Université d'Orléans - UT - Université de Tours - UCA - Université Clermont Auvergne, OCDE - Organisation de Coopération et de Développement Economiques = Organisation for Economic Co-operation and Development

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Abstract: This paper investigates the causal impact of fiscal rules on banking system stability in developing countries. Using a panel of 62 developing economies over the period 1990-2020, the authors assess whether adopting a fiscal rule contributes to reducing the level of non-performing loans, a key indicator of banking vulnerability. The analysis relies on entropy balancing to ensure covariates balance between treated and control groups. Results indicate that the adoption of fiscal rules significantly reduces the ratio of non-performing loans, with an average treatment effect of approximately 0.97 percentage points. The study identifies multiple transmission channels-sovereign credit ratings, income inequality reduction, and macroeconomic stabilization-through which fiscal rules indirectly strengthen banking stability. Heterogeneity analysis reveals that the effect varies by the type and duration of the rule and by structural financial characteristics. This research contributes to the literature by extending the role of fiscal rules beyond debt and deficit control, framing them as institutional anchors for financial stability in fiscally and economically vulnerable contexts.

Keywords: Fiscal rules Banking stability Developing countries Entropy balancing F34; G1; H63; Fiscal rules; Banking stability; Developing countries; Entropy balancing F34 (search for similar items in EconPapers)
Date: 2025-07-16
Note: View the original document on HAL open archive server: https://hal.science/hal-05165825v1
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Persistent link: https://EconPapers.repec.org/RePEc:hal:wpaper:hal-05165825

DOI: 10.5281/zenodo.15976850

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