The Impact of Geopolitical Crises on Fiscal and Budgetary Stability

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.