Sovereign Credit Ratings under Fiscal Uncertainty
Download PDF: Working Paper 32
This paper finds that fiscal uncertainty is an important determinant of sovereign credit ratings, and can explain why ratings often appear pro-cyclical during crisis periods.
Author: Arno Hantzsche
Abstract:
This paper studies the response of credit rating agencies to an increase in uncertainty about a government's fiscal position. To that end, a measure of the uncertainty around official forecasts of the public budget deficit is constructed that is comparable across time and a range of advanced economies. To estimate the effect of fiscal uncertainty on sovereign credit ratings, an empirical framework is developed that accounts for the high stability of ratings over time. Results suggest that fiscal uncertainty increases the predictive power of a model of rating changes and can explain why sovereign ratings are often changed more frequently during crises.
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Keywords: uncertainty, fiscal policy, sovereign credit ratings, ordered outcome estimation
JEL codes: C35, G24, H68