Author(s): Jalles, João Tovar ; Teixeira, André
Date: 2025
Persistent ID: http://hdl.handle.net/10400.5/99164
Origin: Repositório da Universidade de Lisboa
Subject(s): Fiscal Consolidations; Bank Efficiency; Tax-Based Adjustments; Panel Data; Local Projections
This paper explores the impact of fiscal consolidations on banking behavior, focusing on efficiency and stability. Using a panel dataset covering 194 countries from 1989 to 2020 and employing local projection methods, we find that fiscal consolidations improve bank stability at the expense of efficiency. The decline in efficiency is attributed to reduced operational income, while stability gains stem from improved asset quality and bolstered capital adequacy. The effects are heterogeneous: consolidations have a more substantial negative impact on efficiency in advanced economies, while stability improvements are more pronounced in emerging markets. The size and composition of fiscal adjustments also matter: tax-based consolidations favor stability more than expenditure-based ones. Robustness checks with alternative definitions of fiscal consolidations and non-linear models confirm these findings. The findings emphasize the importance of tailoring fiscal consolidations to country-specific factors to balance stability and efficiency in the banking sector.
