Fiscal uncertainty and sovereign credit risk

Arno Hantzsche

European Economic Review, 2022, vol. 148, issue C

Abstract: Periods of economic crisis and large fiscal interventions are often associated with elevated levels of uncertainty about governments’ future fiscal positions. This paper studies the impact of fiscal uncertainty on sovereign credit risk, and on the attention paid to expert assessments of such risk, using the example of sovereign credit ratings. Employing data that covers the Global Financial Crisis, a measure of fiscal uncertainty is constructed that is comparable across time and a range of advanced economies. To estimate the determinants of sovereign credit risk, an empirical framework is developed that accounts for the high stability of credit ratings over time by way of a new estimator for ordered and partially unobserved outcomes. Attention to credit rating announcements is measured using movements in financial market prices and internet search volume. Results suggest that fiscal uncertainty increases the predictive power of a model of sovereign credit ratings and can explain why credit ratings are often changed more frequently during crises. Sovereign credit ratings also gain more attention when uncertainty is high with the potential to aggravate sovereign distress.

Keywords: Uncertainty; Fiscal policy; Sovereign credit ratings; Ordered outcome estimation; Event study; Google Trends (search for similar items in EconPapers)
JEL-codes: C25 G14 G24 H30 (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:148:y:2022:i:c:s0014292122001453

DOI: 10.1016/j.euroecorev.2022.104245

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