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Sovereign Credit Ratings under Fiscal Uncertainty

Author

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  • 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.

Suggested Citation

  • Arno Hantzsche, 2019. "Sovereign Credit Ratings under Fiscal Uncertainty," Working Papers 32, European Stability Mechanism, revised 23 Apr 2019.
    • Handle: RePEc:stm:wpaper:32
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    File URL: https://www.esm.europa.eu/sites/default/files/document/wp32.pdf
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    More about this item

    Keywords

    uncertainty; fiscal policy; sovereign credit ratings; ordered outcome estimation;
    All these keywords.

    JEL classification:

    • C35 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Discrete Regression and Qualitative Choice Models; Discrete Regressors; Proportions
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • H68 - Public Economics - - National Budget, Deficit, and Debt - - - Forecasts of Budgets, Deficits, and Debt

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