The Nonlinear Relationship Between Public Debt and Sovereign Credit Ratings

Metodij Hadzi-Vaskov and Luca Ricci

No 15267, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: This study investigates the relationship between public debt and sovereign credit ratings, using a wide sample of over 100 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 emerging and developing economies (previously suggested in the literature as different relationships). These results hold for both gross and net debt, and are robust to alternative dependent variable definitions, analytical techniques, and empirical specifications.

Keywords: Credit ratings; Public debt; Credit rating agencies; Financial markets; Advanced economies; Emerging markets; Non-linearities (search for similar items in EconPapers)
JEL-codes: E44 E62 G15 G24 (search for similar items in EconPapers)
Date: 2020-09
New Economics Papers: this item is included in nep-cwa, nep-fdg and nep-mac
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Working Paper: The Nonlinear Relationship Between Public Debt and Sovereign Credit Ratings (2019)
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