[go: up one dir, main page]
More Web Proxy on the site http://driver.im/
IDEAS home Printed from https://ideas.repec.org/p/cpr/ceprdp/9665.html
   My bibliography  Save this paper

Sovereign credit ratings in the European Union: a model-based fiscal analysis

Author

Listed:
  • Wickens, Michael R.
  • Polito, Vito
Abstract
We propose a model-based measure of sovereign credit ratings derived solely from the fiscal position of a country: a forecast of its future debt liabilities, and its potential to use tax policy to repay these. We use this measure to calculate credit ratings for fourteen European countries over the period 1995-2012. This measure identifies a European sovereign debt crisis almost two years before the official ratings of the credit rating agencies.

Suggested Citation

  • Wickens, Michael R. & Polito, Vito, 2013. "Sovereign credit ratings in the European Union: a model-based fiscal analysis," CEPR Discussion Papers 9665, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:9665
    as

    Download full text from publisher

    File URL: https://cepr.org/publications/DP9665
    Download Restriction: CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org
    ---><---

    As the access to this document is restricted, you may want to look for a different version below or search for a different version of it.

    Other versions of this item:

    References listed on IDEAS

    as
    1. Eaton, Jonathan & Fernandez, Raquel, 1995. "Sovereign debt," Handbook of International Economics, in: G. M. Grossman & K. Rogoff (ed.), Handbook of International Economics, edition 1, volume 3, chapter 3, pages 2031-2077, Elsevier.
    2. James H. Stock & Mark W. Watson, 2008. "Phillips curve inflation forecasts," Conference Series ; [Proceedings], Federal Reserve Bank of Boston.
    3. Fernando Broner & Alberto Martin & Jaume Ventura, 2010. "Sovereign Risk and Secondary Markets," American Economic Review, American Economic Association, vol. 100(4), pages 1523-1555, September.
    4. Davig, Troy & Leeper, Eric M. & Walker, Todd B., 2011. "Inflation and the fiscal limit," European Economic Review, Elsevier, vol. 55(1), pages 31-47, January.
    5. Michael Wickens, 2014. "How Useful are DSGE Macroeconomic Models for Forecasting?," Open Economies Review, Springer, vol. 25(1), pages 171-193, February.
    6. Carmen M. Reinhart & Kenneth S. Rogoff, 2014. "This Time is Different: A Panoramic View of Eight Centuries of Financial Crises," Annals of Economics and Finance, Society for AEF, vol. 15(2), pages 215-268, November.
    7. European Commission, 2013. "Taxation trends in the European Union: 2013 edition," Taxation trends 2013, Directorate General Taxation and Customs Union, European Commission.
    8. Canova, Fabio & Ferroni, Filippo, 2012. "The dynamics of US inflation: Can monetary policy explain the changes?," Journal of Econometrics, Elsevier, vol. 167(1), pages 47-60.
    9. Frijns, Bart & Lehnert, Thorsten & Zwinkels, Remco C.J., 2010. "Behavioral heterogeneity in the option market," Journal of Economic Dynamics and Control, Elsevier, vol. 34(11), pages 2273-2287, November.
    10. Patrick Bolton & Xavier Freixas & Joel Shapiro, 2012. "The Credit Ratings Game," Journal of Finance, American Finance Association, vol. 67(1), pages 85-112, February.
    11. Mathias Trabandt & Harald Uhlig, 2012. "How Do Laffer Curves Differ across Countries?," NBER Chapters, in: Fiscal Policy after the Financial Crisis, pages 211-249, National Bureau of Economic Research, Inc.
    12. Hess Chung & Eric Leeper, 2007. "What Has Financed Government Debt?," CAEPR Working Papers 2007-015, Center for Applied Economics and Policy Research, Department of Economics, Indiana University Bloomington.
    13. S. Rao Aiyagari, 1994. "Uninsured Idiosyncratic Risk and Aggregate Saving," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 109(3), pages 659-684.
    14. Christopher A. Sims & Tao Zha, 2006. "Were There Regime Switches in U.S. Monetary Policy?," American Economic Review, American Economic Association, vol. 96(1), pages 54-81, March.
    15. Matthew B. Canzoneri & Robert E. Cumby & Behzad T. Diba, 2002. "Should the European Central Bank and the Federal Reserve be concerned about fiscal policy?," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 333-389.
    16. Davig, Troy & Leeper, Eric M. & Walker, Todd B., 2010. ""Unfunded liabilities" and uncertain fiscal financing," Journal of Monetary Economics, Elsevier, vol. 57(5), pages 600-619, July.
    17. Afonso, António & Furceri, Davide & Gomes, Pedro, 2012. "Sovereign credit ratings and financial markets linkages: Application to European data," Journal of International Money and Finance, Elsevier, vol. 31(3), pages 606-638.
    18. Cristina Arellano, 2008. "Default Risk and Income Fluctuations in Emerging Economies," American Economic Review, American Economic Association, vol. 98(3), pages 690-712, June.
    19. Merton, Robert C, 1974. "On the Pricing of Corporate Debt: The Risk Structure of Interest Rates," Journal of Finance, American Finance Association, vol. 29(2), pages 449-470, May.
    20. George Kapetanios & Haroon Mumtaz & Ibrahim Stevens & Konstantinos Theodoridis, 2012. "Assessing the Economy‐wide Effects of Quantitative Easing," Economic Journal, Royal Economic Society, vol. 122(564), pages 316-347, November.
    21. António Afonso & Pedro Gomes & Philipp Rother, 2011. "Short‐ and long‐run determinants of sovereign debt credit ratings," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 16(1), pages 1-15, January.
    22. European Commission, 2012. "Taxation trends in the European Union: 2012 edition," Taxation trends 2012, Directorate General Taxation and Customs Union, European Commission.
    23. Orphanides, Athanasios & Wei, Min, 2012. "Evolving macroeconomic perceptions and the term structure of interest rates," Journal of Economic Dynamics and Control, Elsevier, vol. 36(2), pages 239-254.
    24. G. M. Grossman & K. Rogoff (ed.), 1995. "Handbook of International Economics," Handbook of International Economics, Elsevier, edition 1, volume 3, number 3.
    25. M.-L. Gavard-Perret & C. Chamard & Marianela Fornerino & J.-P. Galan, 2010. "le marketing de A à Z," Post-Print halshs-00559466, HAL.
    26. Jonathan Eaton & Mark Gersovitz, 1981. "Debt with Potential Repudiation: Theoretical and Empirical Analysis," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 48(2), pages 289-309.
    27. Harold L. Cole & Timothy J. Kehoe, 2000. "Self-Fulfilling Debt Crises," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 67(1), pages 91-116.
    28. Polito, Vito & Wickens, Mike, 2014. "Modelling the U.S. sovereign credit rating," Journal of Banking & Finance, Elsevier, vol. 46(C), pages 202-218.
    29. Cochrane, John H., 2011. "Understanding policy in the great recession: Some unpleasant fiscal arithmetic," European Economic Review, Elsevier, vol. 55(1), pages 2-30, January.
    30. Mathis, Jérôme & McAndrews, James & Rochet, Jean-Charles, 2009. "Rating the raters: Are reputation concerns powerful enough to discipline rating agencies?," Journal of Monetary Economics, Elsevier, vol. 56(5), pages 657-674, July.
    31. Bi, Huixin, 2012. "Sovereign default risk premia, fiscal limits, and fiscal policy," European Economic Review, Elsevier, vol. 56(3), pages 389-410.
    32. Vito Polito & Michael Wickens, 2011. "Assessing the fiscal stance in the European Union and the United States, 1970–2011 [‘A historical public debt database’]," Economic Policy, CEPR, CESifo, Sciences Po;CES;MSH, vol. 26(68), pages 599-647.
    33. John B. Taylor, 2010. "Commentary: monetary policy after the fall," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 337-348.
    34. Hill, Paula & Brooks, Robert & Faff, Robert, 2010. "Variations in sovereign credit quality assessments across rating agencies," Journal of Banking & Finance, Elsevier, vol. 34(6), pages 1327-1343, June.
    35. Norbert Gaillard, 2012. "A Century of Sovereign Ratings," Springer Books, Springer, number 978-1-4614-0523-8, June.
    36. Coleman, Wilbur John, II, 1991. "Equilibrium in a Production Economy with an Income Tax," Econometrica, Econometric Society, vol. 59(4), pages 1091-1104, July.
    37. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-654, May-June.
    38. Polito, Vito & Wickens, Mike, 2012. "A model-based indicator of the fiscal stance," European Economic Review, Elsevier, vol. 56(3), pages 526-551.
    39. Giorgio E. Primiceri, 2005. "Time Varying Structural Vector Autoregressions and Monetary Policy," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 72(3), pages 821-852.
    40. Lawrence J. White, 2010. "Markets: The Credit Rating Agencies," Journal of Economic Perspectives, American Economic Association, vol. 24(2), pages 211-226, Spring.
    41. Mathias Trabandt & Harald Uhlig, 2012. "How Do Laffer Curves Differ across Countries?," NBER Chapters, in: Fiscal Policy after the Financial Crisis, pages 211-249, National Bureau of Economic Research, Inc.
    42. Oecd, 2010. "Labour markets and the crisis," OECD Economics Department Working Papers 756, OECD Publishing.
    43. Trabandt, Mathias & Uhlig, Harald, 2011. "The Laffer curve revisited," Journal of Monetary Economics, Elsevier, vol. 58(4), pages 305-327.
    44. European Commission, 2009. "Taxation trends in the European Union: 2009 edition," Taxation trends 2009, Directorate General Taxation and Customs Union, European Commission.
    45. Mit, 2010. "Lemons, Market Shutdowns and Learning," 2010 Meeting Papers 1098, Society for Economic Dynamics.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Jan Bruha & Moritz Karber & Beatrice Pierluigi & Ralph Setzer, 2017. "Understanding Rating Movements in Euro Area Countries," Working Papers 2017/06, Czech National Bank.
    2. Heer, Burkhard & Polito, Vito & Wickens, Michael R., 2020. "Population aging, social security and fiscal limits," Journal of Economic Dynamics and Control, Elsevier, vol. 116(C).
    3. Wickens, Michael, 2016. "Is there an alternative way to avoid another eurozone crisis to the Five Presidents' Report?," Journal of Empirical Finance, Elsevier, vol. 39(PB), pages 156-165.
    4. Abdul Rafay & Yang Chen & Muhammad A.B.Naeem & Maham Ijaz, 2018. "Analyzing the Impact of Credit Ratings on Firm Performance and Stock Returns: An Evidence from Taiwan," Iranian Economic Review (IER), Faculty of Economics,University of Tehran.Tehran,Iran, vol. 22(3), pages 771-790, Summer.
    5. Cimadomo, Jacopo & Claeys, Peter & Poplawski-Ribeiro, Marcos, 2016. "How do experts forecast sovereign spreads?," European Economic Review, Elsevier, vol. 87(C), pages 216-235.
    6. Wickens, Michael R., 2016. "Is there an alternative way to avoid another eurozone crisis to the Five Presidents' Report?," CEPR Discussion Papers 11225, C.E.P.R. Discussion Papers.
    7. Zoran Ivanovic & Sinisa Bogdan & Suzana Baresa, 2015. "Modeling and Estimating Shadow Sovereign Ratings," Contemporary Economics, University of Economics and Human Sciences in Warsaw., vol. 9(3), September.
    8. Polito, Vito & Wickens, Michael, 2014. "How the Euro Crisis Evolved and how to Avoid Another: EMU, Fiscal Policy and Credit Ratings," Journal of Macroeconomics, Elsevier, vol. 39(PB), pages 364-374.
    9. Javier Andrés & Pablo Burriel & Wenyi Shen, 2020. "Debt sustainability and fiscal space in a heterogeneous Monetary Union: normal times vs the zero lower bound," Working Papers 2001, Banco de España.
    10. Ben Hmiden, Oussama & Ben Cheikh, Nidhaleddine, 2016. "Debt-threshold effect in sovereign credit ratings: New evidence from nonlinear panel smooth transition models," Finance Research Letters, Elsevier, vol. 19(C), pages 273-278.
    11. Bi, Huixin & Shen, Wenyi & Yang, Shu-Chun S., 2016. "Fiscal limits in developing countries: A DSGE Approach," Journal of Macroeconomics, Elsevier, vol. 49(C), pages 119-130.
    12. Martin Guzman & Domenico Lombardi, 2018. "Assessing the Appropriate Size of Relief in Sovereign Debt Restructuring," Documentos de trabajo del Instituto Interdisciplinario de Economía Política IIEP (UBA-CONICET) 2018-26, Universidad de Buenos Aires, Facultad de Ciencias Económicas, Instituto Interdisciplinario de Economía Política IIEP (UBA-CONICET).
    13. King Yoong Lim & Pengfei Jia & Ali Raza, 2018. "Crime, Human Capital, and the Impact of Different Taxation," Working Papers 220851234, Lancaster University Management School, Economics Department.
    14. Christian Bauer & Marc-Patrick Adolph, 2020. "Structured Common Project Financing (SCPF): Efficiency without Debt Mutualization," Research Papers in Economics 2020-02, University of Trier, Department of Economics.
    15. Pierluigi, Beatrice & Brůha, Jan & Setzer, Ralph & Karber, Moritz, 2017. "Understanding sovereign rating movements in euro area countries," Working Paper Series 2011, European Central Bank.
    16. Ben Hmiden, Oussama & Tatoutchoup, Didier & Nguimkeu, Pierre & Avelé, Donatien, 2024. "Discrepancy and cross-regional bias in sovereign credit ratings: Analyzing the role of public debt," Economic Modelling, Elsevier, vol. 131(C).
    17. Michael Wickens, 2016. "The eurozone financial crisis: debt, credit ratings and monetary and fiscal policy," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 43(2), pages 219-233, May.
    18. Bauer, Christian & Adolph, Marc-Patrick, 2021. "Limited joint liability in structured Eurobonds: Pricing the political costs," Journal of International Money and Finance, Elsevier, vol. 113(C).

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Polito, Vito & Wickens, Mike, 2014. "Modelling the U.S. sovereign credit rating," Journal of Banking & Finance, Elsevier, vol. 46(C), pages 202-218.
    2. Wickens, Michael R. & Polito, Vito, 2013. "Is the UK triple-A?," CEPR Discussion Papers 9378, C.E.P.R. Discussion Papers.
    3. Daniel, Betty C. & Shiamptanis, Christos, 2012. "Fiscal risk in a monetary union," European Economic Review, Elsevier, vol. 56(6), pages 1289-1309.
    4. Fabrice Collard & Michel Habib & Jean-Charles Rochet, 2015. "Sovereign Debt Sustainability In Advanced Economies," Journal of the European Economic Association, European Economic Association, vol. 13(3), pages 381-420, June.
    5. D’Erasmo, P. & Mendoza, E.G. & Zhang, J., 2016. "What is a Sustainable Public Debt?," Handbook of Macroeconomics, in: J. B. Taylor & Harald Uhlig (ed.), Handbook of Macroeconomics, edition 1, volume 2, chapter 0, pages 2493-2597, Elsevier.
    6. Daniel, Betty C. & Shiamptanis, Christos, 2013. "Pushing the limit? Fiscal policy in the European Monetary Union," Journal of Economic Dynamics and Control, Elsevier, vol. 37(11), pages 2307-2321.
    7. Huixin Bi & Eric M. Leeper, 2013. "Analyzing Fiscal Sustainability," Staff Working Papers 13-27, Bank of Canada.
    8. Christos Shiamptanis, 2012. "Risk Assessment Under a Non-linear Fiscal Rule," Working Papers 038, Toronto Metropolitan University, Department of Economics.
    9. Bi, Huixin, 2012. "Sovereign default risk premia, fiscal limits, and fiscal policy," European Economic Review, Elsevier, vol. 56(3), pages 389-410.
    10. Christos Shiamptanis, 2015. "Risk Assessment Under A Nonlinear Fiscal Policy Rule," Economic Inquiry, Western Economic Association International, vol. 53(3), pages 1539-1555, July.
    11. Richter, Alexander W., 2015. "Finite lifetimes, long-term debt and the fiscal limit," Journal of Economic Dynamics and Control, Elsevier, vol. 51(C), pages 180-203.
    12. Gibert, Anna, 2022. "Signalling creditworthiness with fiscal austerity," European Economic Review, Elsevier, vol. 144(C).
    13. Hürtgen, Patrick & Rühmkorf, Ronald, 2014. "Sovereign default risk and state-dependent twin deficits," Journal of International Money and Finance, Elsevier, vol. 48(PB), pages 357-382.
    14. Michael Tomz & Mark L.J. Wright, 2013. "Empirical Research on Sovereign Debt and Default," Annual Review of Economics, Annual Reviews, vol. 5(1), pages 247-272, May.
    15. repec:wlu:lcerpa:wm0070 is not listed on IDEAS
    16. Zuzana Mucka, 2019. "The mirror does not lie: Endogenous fiscal limits for Slovakia," Working Papers Working Paper No. 2/2019, Council for Budget Responsibility.
    17. Niepelt, Dirk, 2014. "Debt maturity without commitment," Journal of Monetary Economics, Elsevier, vol. 68(S), pages 37-54.
    18. Sokolova, Anna, 2015. "Fiscal limits and monetary policy: default vs. inflation," Economic Modelling, Elsevier, vol. 48(C), pages 189-198.
    19. Daniel, Betty C. & Nam, Jinwook, 2022. "The Greek debt crisis: Excusable vs. strategic default," Journal of International Economics, Elsevier, vol. 138(C).
    20. Jan Bruha & Moritz Karber & Beatrice Pierluigi & Ralph Setzer, 2017. "Understanding Rating Movements in Euro Area Countries," Working Papers 2017/06, Czech National Bank.
    21. Ugo Panizza & Federico Sturzenegger & Jeromin Zettelmeyer, 2009. "The Economics and Law of Sovereign Debt and Default," Journal of Economic Literature, American Economic Association, vol. 47(3), pages 651-698, September.

    More about this item

    Keywords

    Credit risk; Default probability; Fiscal policy; Sovereign risk;
    All these keywords.

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H30 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - General
    • H60 - Public Economics - - National Budget, Deficit, and Debt - - - General

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:cpr:ceprdp:9665. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: the person in charge (email available below). General contact details of provider: https://www.cepr.org .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.