Dynamic Implications of Fiscal Policy on NPLs: Theoretical Analysis and Panel-Regression Empirics

This paper investigates the interaction between fiscal policy and non-performing loans (NPLs), a nexus often overlooked in banking stability literature. By proposing a generalized theoretical framework that augments the industrial organization (IO) theory of banking with liquidity preference theory, this study explains why a fiscal contraction (an improvement in the primary balance from deficit toward surplus) can decrease NPLs in a bank’s portfolio. Using bank-level quarterly data from Guyana (