Advanced Search
MyIDEAS: Login

The Effects of Debt Intolerance and Public Debt Sustainability on Credit Ratings: Evidence From European Economies

Contents:

Author Info

  • Ata Ozkaya

    ()
    (Galatasaray University Faculty of Economics and Administrative Sciences)

Abstract

The question whether a government’s fiscal policy is consistent with an intertemporal budget constraint has been motivated a number of empirical studies. The econometric approach focuses on the circumstances under which a government is able to sustain its budget deficits without defaulting on its debt. In this contribution, by linking the different motives on long-run sustainability of public debt, we develop a compact step-wise test algorithm and apply that to the PIIGS countries and United Kingdom. Secondly, we introduce phase-space reconstruction methodology in order to locate the path for debt dynamics, which enables us to observe fiscal policy implications in short and medium-term. We conclude that Greece, Ireland, Portugal are characterized by unsustainable debt policies. For Italy, Spain and United Kingdom, we could not reach clear cut results. For those economies while the outcome of test algorithm indicates the sustainability of debt policy, phase-space examination shows that the reaction of the governments to diverging debt stock GDP ratio cannot be sufficient to stabilize the path for debt dynamics. Last, we measure relative credit ratings of 25 OECD countries, including Turkey and eurozone economies. Our measurement method is based on the fundamentals used for measuring public debt sustainability: GDP per capita, change in Consumer prices (CPI), and GDP ratios of; General government budget balance, General government primary balance, General government gross debt stock, Current account balance, Public foreign currency debt stock. For each country, these seven inter-related criteria are examined during three non-overlapping periods: 2005-2010, 2011 and 2012-2013. We conclude that the countries that have trouble with debt sustainability have overestimated sovereign credit ratings and hence they will eventually be revised.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://betam.bahcesehir.edu.tr/tr/wp-content/uploads/2013/04/WorkingPaper011.pdf
Download Restriction: no

Bibliographic Info

Paper provided by Bahcesehir University, Betam in its series Working Papers with number 011.

as in new window
Length: 31 pages
Date of creation: Apr 2013
Date of revision:
Handle: RePEc:bae:wpaper:011

Contact details of provider:
Email:
Web page: http://www.betam.bahcesehir.edu.tr
More information through EDIRC

Related research

Keywords:

This paper has been announced in the following NEP Reports:

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. Axel Dreher & Bernhard Herz & Volker Karb, 2005. "Is There a Causal Link between Currency and Debt Crisis?," TWI Research Paper Series 3, Thurgauer Wirtschaftsinstitut, Universität Konstanz.
  2. James Payne & Hassan Mohammadi & Murat Cak, 2008. "Turkish budget deficit sustainability and the revenue-expenditure nexus," Applied Economics, Taylor & Francis Journals, vol. 40(7), pages 823-830.
  3. Tanner, Evan & Liu, Peter, 1994. "Is the Budget Deficit "Too Large"?: Some Further Evidence," Economic Inquiry, Western Economic Association International, vol. 32(3), pages 511-18, July.
  4. Joakim Westerlund & Silika Prohl, 2010. "Panel cointegration tests of the sustainability hypothesis in rich OECD countries," Applied Economics, Taylor & Francis Journals, vol. 42(11), pages 1355-1364.
  5. Buiter, Willem H & Patel, U, 1990. "Debt, Deficits and Inflation: An Application to the Public Finance of India," CEPR Discussion Papers 408, C.E.P.R. Discussion Papers.
  6. Carmen M. Reinhart & Kenneth S. Rogoff & Miguel A. Savastano, 2003. "Debt Intolerance," NBER Working Papers 9908, National Bureau of Economic Research, Inc.
    • Reinhart, Carmen & Rogoff, Kenneth & Savastano, Miguel, 2003. "Debt intolerance," MPRA Paper 13932, University Library of Munich, Germany.
  7. Oscar Bajo-Rubio & Carmen Díaz-Roldán & Vicente Esteve, 2003. "Searching for Threshold Effects in the Evolution of Budget Deficits: An Application to the Spanish Case," Economic Working Papers at Centro de Estudios Andaluces E2003/29, Centro de Estudios Andaluces.
  8. Gael M. Martin, 2000. "US deficit sustainability: a new approach based on multiple endogenous breaks," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 15(1), pages 83-105.
  9. Bohn, Henning, 1995. "The Sustainability of Budget Deficits in a Stochastic Economy," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(1), pages 257-71, February.
  10. Nigel Andrew Chalk & Richard Hemming, 2000. "Assessing Fiscal Sustainability in Theory and Practice," IMF Working Papers 00/81, International Monetary Fund.
  11. Engle, Robert F & Granger, Clive W J, 1987. "Co-integration and Error Correction: Representation, Estimation, and Testing," Econometrica, Econometric Society, vol. 55(2), pages 251-76, March.
  12. Johansen, Soren, 1991. "Estimation and Hypothesis Testing of Cointegration Vectors in Gaussian Vector Autoregressive Models," Econometrica, Econometric Society, vol. 59(6), pages 1551-80, November.
  13. 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 1065-1188, November.
  14. Olivier Jean Blanchard, 1990. "Suggestions for a New Set of Fiscal Indicators," OECD Economics Department Working Papers 79, OECD Publishing.
  15. Trehan, Bharat & Walsh, Carl E, 1991. "Testing Intertemporal Budget Constraints: Theory and Applications to U.S. Federal Budget and Current Account Deficits," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 23(2), pages 206-23, May.
  16. Carmen M. Reinhart & Kenneth S. Rogoff, 2010. "From Financial Crash to Debt Crisis," NBER Working Papers 15795, National Bureau of Economic Research, Inc.
  17. Husted, Steven, 1992. "The Emerging U.S. Current Account Deficit in the 1980s: A Cointegration Analysis," The Review of Economics and Statistics, MIT Press, vol. 74(1), pages 159-66, February.
  18. António Afonso, 2005. "Fiscal Sustainability: The Unpleasant European Case," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 61(1), pages 19-, March.
  19. Giancarlo Corsetti & Nouriel Roubini, 1991. "Fiscal Deficits, Public Debt and Government Solvency: Evidence from OECD Countries," NBER Working Papers 3658, National Bureau of Economic Research, Inc.
  20. Brixi, Hana Polackova & Ghanem, Hafez & Islam, Roumeen, 1999. "Fiscal adjustment and contingent government liabilities : case studies of the Czech Republic and Macedonia," Policy Research Working Paper Series 2177, The World Bank.
  21. Hakkio, Craig S & Rush, Mark, 1991. "Is the Budget Deficit "Too Large?"," Economic Inquiry, Western Economic Association International, vol. 29(3), pages 429-45, July.
Full references (including those not matched with items on IDEAS)

Citations

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:bae:wpaper:011. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Merve Akgul).

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 references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link 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 profile, as there may be some citations waiting for confirmation.

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