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

Author

Listed:
  • 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)

  • Andrei STĂNCULESCU

    (Department of Finance, Faculty of Finance and Banking, Bucharest University of Economic Studies)

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.

Suggested Citation

  • Ionel LEONIDA & Cosmin – Octavian CEPOI & Bogdan – Andrei DUMITRESCU & Carmen OBREJA & Andrei STĂNCULESCU, 2024. "Assessing the fiscal implications of the development of the banking sector. Evidence from OECD countries," Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 0(2), pages 22-31, July.
    • Handle: RePEc:rjr:romjef:v::y:2024:i:2:p:22-31
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    More about this item

    Keywords

    Budget Deficit; Public Debt; COVID-19; Smooth Transition; OECD countries;
    All these keywords.

    JEL classification:

    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • H30 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - General

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