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Can fiscal rules improve banking system stability in developing countries?

Author

Listed:
  • 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)

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.

Suggested Citation

  • Yacouba Coulibaly & Askandarou Cheik Diallo, 2025. "Can fiscal rules improve banking system stability in developing countries?," Working Papers hal-05165825, HAL.
    • Handle: RePEc:hal:wpaper:hal-05165825
    DOI: 10.5281/zenodo.15976850
    Note: View the original document on HAL open archive server: https://hal.science/hal-05165825v1
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    Keywords

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    JEL classification:

    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • G1 - Financial Economics - - General Financial Markets
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems

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