Signalling creditworthiness with fiscal austerity

Anna Gibert

European Economic Review, 2022, vol. 144, issue C

Abstract: Sovereign borrowers may tighten their fiscal stance in order to signal their creditworthiness to lenders. In a model of sovereign debt with incomplete information, I show that a trustworthy country may reduce its debt beyond the optimal level in order to separate itself from less reliable countries. Since austerity is costly, the gains in the price of debt from separating need to be high enough, as is the case when credit ratings provide very noisy signals. I proxy for the informativeness of the ratings with two model-implied variables and find empirical support for the existence of a signalling channel.

Keywords: Signalling; Fiscal austerity; Sovereign debt; Credit ratings (search for similar items in EconPapers)
JEL-codes: D82 E62 F34 G24 (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:eecrev:v:144:y:2022:i:c:s0014292122000368

DOI: 10.1016/j.euroecorev.2022.104090

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