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Fiscal uncertainty and sovereign credit risk

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  • Hantzsche, Arno

Abstract

Periods of economic crisis and large fiscal interventions are often associated with elevated levels of uncertainty about governments’ future fiscal positions. This paper studies the impact of fiscal uncertainty on sovereign credit risk, and on the attention paid to expert assessments of such risk, using the example of sovereign credit ratings. Employing data that covers the Global Financial Crisis, a measure of fiscal uncertainty is constructed that is comparable across time and a range of advanced economies. To estimate the determinants of sovereign credit risk, an empirical framework is developed that accounts for the high stability of credit ratings over time by way of a new estimator for ordered and partially unobserved outcomes. Attention to credit rating announcements is measured using movements in financial market prices and internet search volume. Results suggest that fiscal uncertainty increases the predictive power of a model of sovereign credit ratings and can explain why credit ratings are often changed more frequently during crises. Sovereign credit ratings also gain more attention when uncertainty is high with the potential to aggravate sovereign distress.

Suggested Citation

  • Hantzsche, Arno, 2022. "Fiscal uncertainty and sovereign credit risk," European Economic Review, Elsevier, vol. 148(C).
  • Handle: RePEc:eee:eecrev:v:148:y:2022:i:c:s0014292122001453
    DOI: 10.1016/j.euroecorev.2022.104245
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    More about this item

    Keywords

    Uncertainty; Fiscal policy; Sovereign credit ratings; Ordered outcome estimation; Event study; Google Trends;
    All these keywords.

    JEL classification:

    • C25 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Discrete Regression and Qualitative Choice Models; Discrete Regressors; Proportions; Probabilities
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • H30 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - General

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