The Nonlinear Relationship Between Public Debt and Sovereign Credit Ratings
IMF Working Papers, July 26, 2019
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- The Nonlinear Relationship Between Public Debt and Sovereign Credit Ratings
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Bibliographic details
- Authors: Metodij Hadzi-Vaskov, Luca A Ricci
- Published: July 26, 2019
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781498325059.001
Summary findings
- The 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.
- Key empirical findings:
- 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;
- iii) the identified nonlinearity explains the differential impact of debt on ratings in advanced economies versus in emerging markets and developing economies.
- Results hold for both gross debt and net debt.
- Results are robust to alternative dependent variable definitions, analytical techniques, and empirical specifications.
- Policy-relevant conclusion: these findings underscore the potential for fiscal consolidation in helping countries achieve a better credit rating.
Robustness, scope, and methodology highlights
- Sample: over one hundred advanced, emerging, and developing economies.
- Dependent variables and specifications: findings robust across alternative dependent variable definitions, analytical techniques, and empirical specifications.
- Debt measures: both gross debt and net debt produce consistent results.
- Nonlinearity: relationship varies by rating grade, producing differential effects across country groups (advanced economies versus emerging markets and developing economies).
Policy implications and interpretation
- Fiscal consolidation can potentially improve sovereign credit ratings, given the documented negative and nonlinear relationship between public debt and ratings.
- The nonlinear dependence on rating grade implies that the marginal effect of debt reduction on the probability of moving to a higher rating category varies across rating levels and across country groups.
Metodij Hadzi-Vaskov and Luca A Ricci, "The Nonlinear Relationship Between Public Debt and Sovereign Credit Ratings", IMF Working Papers 2019, 162 (July 26, 2019).
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