The Nonlinear Relationship Between Public Debt and Sovereign Credit Ratings

Author/Editor:

Metodij Hadzi-Vaskov ; Luca A Ricci

Publication Date:

July 26, 2019

Electronic Access:

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Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary:

This study investigates the nonlinear relationship between public debt and sovereign credit ratings, using a wide sample of over one hundred advanced, emerging, and developing economies. It finds that: i) higher public debt lowers the probability of being placed in a higher rating category; ii) the negative debt-ratings relationship is nonlinear and depends on the rating grade itself; and iii) the identified nonlinearity explains the differential impact of debt on ratings in advanced economies versus in emerging markets and developing economies. These results hold for both gross debt and net debt, and are robust to alternative dependent variable definitions, analytical techniques, and empirical specifications. These findings underscore the potential for fiscal consolidation in helping countries achieve a better credit rating.

Series:

Working Paper No. 19/162

Subject:

English

Publication Date:

July 26, 2019

ISBN/ISSN:

9781498325059/1018-5941

Stock No:

WPIEA2019162

Price:

$18.00 (Academic Rate:$18.00)

Format:

Paper

Pages:

37

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