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The role of sovereign credit ratings in fiscal discipline

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  • Duygun, Meryem
  • Ozturk, Huseyin
  • Shaban, Mohamed

Abstract

This paper investigates several aspects of the relationship between sovereign credit ratings and fiscal discipline. The analysis of over one thousand country–year observations for 93 countries during the 1999–2010 period reveals that a country's debt level is likely to increase with higher ratings, confirming the existence of pro-cyclicality and path dependence of ratings. In addition, the study finds no evidence to support the theory of Political Business Cycle, which implies that political ambitions may lead to fiscal worsening following a rating upgrade. The study findings further demonstrate that institutional quality is an important factor in the ratings–fiscal discipline nexus.

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  • Duygun, Meryem & Ozturk, Huseyin & Shaban, Mohamed, 2016. "The role of sovereign credit ratings in fiscal discipline," Emerging Markets Review, Elsevier, vol. 27(C), pages 197-216.
    • Handle: RePEc:eee:ememar:v:27:y:2016:i:c:p:197-216
    DOI: 10.1016/j.ememar.2016.05.002
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    2. Mehmet Selman Colak & Sumeyra Korkmaz & Huseyin Ozturk & Muhammed Hasan Yilmaz, 2024. "It Is Not Your Risk but It Is Your Problem: A Spatial Analysis of Emerging Market Credit Default Swap Premia," CBT Research Notes in Economics 2406, Research and Monetary Policy Department, Central Bank of the Republic of Turkey.
    3. Boumparis, Periklis & Milas, Costas & Panagiotidis, Theodore, 2019. "Non-performing loans and sovereign credit ratings," International Review of Financial Analysis, Elsevier, vol. 64(C), pages 301-314.
    4. Drago, Danilo & Gallo, Raffaele, 2017. "The impact of sovereign rating changes on the activity of European banks," Journal of Banking & Finance, Elsevier, vol. 85(C), pages 99-112.

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