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Signalling creditworthiness with fiscal austerity

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  • Gibert, Anna

Abstract

Sovereign borrowers may tighten their fiscal stance in order to signal their creditworthiness to lenders. In a model of sovereign debt with incomplete information, I show that a trustworthy country may reduce its debt beyond the optimal level in order to separate itself from less reliable countries. Since austerity is costly, the gains in the price of debt from separating need to be high enough, as is the case when credit ratings provide very noisy signals. I proxy for the informativeness of the ratings with two model-implied variables and find empirical support for the existence of a signalling channel.

Suggested Citation

  • Gibert, Anna, 2022. "Signalling creditworthiness with fiscal austerity," European Economic Review, Elsevier, vol. 144(C).
    • Handle: RePEc:eee:eecrev:v:144:y:2022:i:c:s0014292122000368
    DOI: 10.1016/j.euroecorev.2022.104090
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    3. Ethan Ilzetzki & Heidi Christina Thysen, 2024. "Fiscal Rules and Market Discipline," Discussion Papers 2409, Centre for Macroeconomics (CFM).

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    More about this item

    Keywords

    Signalling; Fiscal austerity; Sovereign debt; Credit ratings;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage

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