DP15267 The Nonlinear Relationship Between Public Debt and Sovereign Credit Ratings

Author(s): Metodij Hadzi-Vaskov, Luca Antonio Ricci
Publication Date: September 2020
Keyword(s): Advanced economies, Credit rating agencies, Credit ratings, emerging markets, financial markets, non-linearities, public debt
JEL(s): E44, E62, G15, G24
Programme Areas: Financial Economics, International Macroeconomics and Finance, Monetary Economics and Fluctuations
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=15267

This study investigates the relationship between public debt and sovereign credit ratings, using a wide sample of over 100 advanced, emerging, and developing economies. It finds that: i) higher public debt lowers the probability of being placed in a higher rating category; ii) the negative debt-ratings relationship is nonlinear and depends on the rating grade itself; and iii) the identified nonlinearity explains the differential impact of debt on ratings in advanced economies versus emerging and developing economies (previously suggested in the literature as different relationships). These results hold for both gross and net debt, and are robust to alternative dependent variable definitions, analytical techniques, and empirical specifications.