Fiscal Policy and Financial Development

26 Pages Posted: 3 Mar 2006

See all articles by David Hauner

David Hauner

International Monetary Fund (IMF) - African Department

Date Written: January 2006


We examine the effects of public sector borrowing from the domestic banking system on financial development in middle-income countries. While these countries' external debt has been falling, the share of bank credit absorbed by the public sector has been rising rapidly. We argue that this runs the risk of slowing financial development by affecting structural characteristics of the banking systems. We find empirical evidence that too much public sector borrowing harms financial deepening, and that banks mainly lending to the public sector tend to be more profitable but less efficient. We note that these effects add to the costs of fiscal prolificacy.

Keywords: Bank efficiency, bank profitability, fiscal policy, financial development

JEL Classification: G21, H6

Suggested Citation

Hauner, David, Fiscal Policy and Financial Development (January 2006). IMF Working Paper, Vol. , pp. 1-26, 2006. Available at SSRN:

David Hauner (Contact Author)

International Monetary Fund (IMF) - African Department ( email )

1700 19th Street, NW
Washington, DC 20431
United States

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