THE IMPACT OF GEOPOLITICAL CRISES ON FISCAL AND BUDGETARY STABILITY

Abstract

This study explores the relationship between geopolitical risk and fiscal-budgetary stability of countries, focusing on how external instability impacts the dynamics of the budget deficit. Using a dynamic System GMM (Arellano-Bover/Blundell-Bond) model on a panel dataset of 25 OECD member countries. The empirical results indicate three fundamental aspects: (i) the existence of significant fiscal inertia, through the positive influence of the lagged value of the deficit on the current one; (ii) a negative relationship between geopolitical risk and the current level of the budget deficit, which suggests a tendency for governments to implement more prudent fiscal policies in times of international uncertainty; and (iii) political stability is found to be a factor favourable to fiscal balance, especially in developed countries, where a predictable political climate and solid institutions allow the formulation and implementation of consistent fiscal policies. Thus, this underlines the importance of a stable policy framework as a foundation for fiscal sustainability, especially in the face of external shocks or high fiscal pressures.

JEL Classification

C33, C58, E62, H12

Keywords

Geopolitical Risk Index, budget deficit, Political Stability Index, OECD countries, Arellano-Bover/Blundell-Bond

How to cite

Maria-Teodora Papainog (2026). THE IMPACT OF GEOPOLITICAL CRISES ON FISCAL AND BUDGETARY STABILITY. Financial Studies, 30(1), 110-124. DOI: 10.65672/fs.2026.1.6.

RePEc record

Handle: RePEc:vls:finstu:v:30:y:2026:i:1:p:110-124