Date
6-17-2026
Department
Helms School of Government
Degree
Doctor of Philosophy in Public Policy (PhD)
Chair
William Scott Wilson
Keywords
data-first modeling, fiscal policy, monetary policy, financial stability, economic stability, debt sustainability, systemic risk, PCA indices, sectoral stress, state-dependent dynamics
Disciplines
Economics | Statistics and Probability
Recommended Citation
George, Heidie Jean, "The Interplay Between Deficit Spending and Financial Instability: An Examination of Fiscal and Monetary Policy Interactions" (2026). Doctoral Dissertations and Projects. 8619.
https://digitalcommons.liberty.edu/doctoral/8619
Abstract
This study investigates the impact of fiscal and monetary policy on financial stability and fragility, focusing on how government spending and deficits contribute to the economic and financial system. Drawing on Minsky’s Financial Instability Hypothesis (FIH) and Financial Fragility Hypothesis (FFH), the research examines the dynamic relationship between fiscal policy, financial stability, and economic stability. The study focuses on understanding how government spending and deficits affect the economic and financial system in context of private and public debt and policy interactions and the role of system risk factors. The study uses Principal Component Analysis (PCA), Vector Autoregression (VAR), Impulse Response Function (IRF), and Quantile Regression. These methods analyze how fiscal policy interacts with deficits, debt accumulation, transmit through the financial system, influencing stability across different economic conditions. The study operationalizes through Economic Stability Indices (ESI) and Financial Conditions Indices (FCI), constructed from data from 2006-2024. The model follows a data-first structure in which PCA reveals latent macro-financial dimensions, including sectoral stress indices and state-dependent dynamics. Research questions focus on the role of government deficits, public debt, and systemic risks in shaping financial and economic stability. The findings provide empirical evidence on how fiscal strategies can be designed to foster long-term economic growth while mitigating financial fragility. This study offers policy insights by identifying conditions under which fiscal and monetary interactions stabilize or destabilize the economy. The results contribute to improving fiscal policy design, debt management strategies, and crisis mitigation frameworks, giving a nuanced understanding of sustainable economic and financial stability.
