The role of sovereign credit ratings in fiscal discipline |
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| Affiliation: | 1. Nottingham University Business School, University of Nottingham, United Kingdom;2. Central Bank of the Republic of Turkey, Turkey;3. Sheffield University Management School, The University of Sheffield, United Kingdom;1. Indian Institute of Technology Madras, India;2. Madras School of Economics, India;1. Lund University and Centre for Financial Econometrics Deakin University, Australia;2. Centre for Financial Econometrics Deakin University, Australia |
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| Abstract: | This paper investigates several aspects of the relationship between sovereign credit ratings and fiscal discipline. The analysis of over one thousand country–year observations for 93 countries during the 1999–2010 period reveals that a country's debt level is likely to increase with higher ratings, confirming the existence of pro-cyclicality and path dependence of ratings. In addition, the study finds no evidence to support the theory of Political Business Cycle, which implies that political ambitions may lead to fiscal worsening following a rating upgrade. The study findings further demonstrate that institutional quality is an important factor in the ratings–fiscal discipline nexus. |
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