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Discussion Paper Details

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Title: Modelling the U.S. sovereign credit rating

Author(s): Vito Polito and Michael R. Wickens

Publication Date: September 2012

Keyword(s): Credit risk, default probability, fiscal limits and Sovereign risk

Programme Area(s): International Macroeconomics

Abstract: A methodology for generating sovereign credit ratings based on macroeconomic theory is proposed. This is applied to quarterly U.S. data from 1970 to 2011. Over this period the official credit rating of U.S. Treasury securities has been of the highest quality. In contrast, the model-based measure finds that there are two clear instances in which the U.S. sovereign credit rating, if evaluated on the basis of economic fundamentals, should have been have been downgraded: the first oil crisis of the 1970s and in the aftermath of the Lehman collapse in 2008. This result is robust to several alternative views on the maximum borrowing capacity of the U.S. economy.

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Bibliographic Reference

Polito, V and Wickens, M. 2012. 'Modelling the U.S. sovereign credit rating'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=9150