Impact of Fiscal Policy on Financial Stability: Empirical Analysis in the Countries of Western Balkans

Abstract

In this thesis, we analyze the impact of fiscal policy on financial stability, using the Western Balkans region as a case study. The research includes 6 countries in the Western Balkans region, while the research period is 14 years (2020-2023). The source of secondary data is from the World Bank, IMF, The Global Economy, as well as statistical agencies of 6 countries. A total of 4 econometric models (OLS, OLSR, FE and RE) were used, where the Hausman test was used to select the most reliable model. The findings show that the Western Balkan region has moderate financial stability, with an average of 44.10. Real interest rates (4.54%) and inflation (3.10%) indicate economic stability. Correlation analysis showed a significant negative relationship between financial stability and inflation rate (r=-0.464, p <0.01), public debt (r=-0.455, p <0.01) and unemployment (r=-0.406, p <0.01), while based on the results of regression analysis real interest rates positively affect FSI (B = 0.14, p = 0.004), while inflation and unemployment show a statistically significant impact.