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Economic freedom and sovereign credit ratings and default risk

  • Saurav Roychoudhury
  • Robert A. Lawson

Purpose – The purpose of this paper is to show that economic policy impacts sovereign debt risk in addition to economic performance. Design/methodology/approach – Regression analysis was employed to determine the factors that contribute to sovereign bond ratings and bond spreads for a sample of 93 countries from 2000 to 2006. Findings – After controlling for common factors like per capita gross domestic production, growth, and political regime, the results suggest that a two unit (or a 2.4 standard deviation) drop in the economic freedom index represents approximately a 50 percent higher cost of borrowing for a country. Originality/value – The paper contributes to the empirical literature on sovereign credit risk by identifying factors found to be the most significant in determining sovereign credit ratings and bond spreads.ent into account.

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Article provided by Emerald Group Publishing in its journal Journal of Financial Economic Policy.

Volume (Year): 2 (2010)
Issue (Month): 2 (June)
Pages: 149-162

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Handle: RePEc:eme:jfeppp:v:2:y:2010:i:2:p:149-162
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  1. Roman Kraeussl, . "Do Changes in Sovereign Credit Ratings Contribute to Financial Contagion in Emerging Market Crises?," Working Papers 0314, University of Crete, Department of Economics.
  2. Robert A. Lawson, 2006. "On Testing the Connection between Economic Freedom and Growth," Econ Journal Watch, Econ Journal Watch, vol. 3(3), pages 398-406, September.
  3. Kaminsky, Graciela & Schmukler, Sergio, 2001. "Emerging markets instability: do sovereign ratings affect country risk and stock returns?," Policy Research Working Paper Series 2678, The World Bank.
  4. Brooks, Robert & Faff, Robert W. & Hillier, David & Hillier, Joseph, 2004. "The national market impact of sovereign rating changes," Journal of Banking & Finance, Elsevier, vol. 28(1), pages 233-250, January.
  5. Gwartney, James & Lawson, Robert, 2003. "The concept and measurement of economic freedom," European Journal of Political Economy, Elsevier, vol. 19(3), pages 405-430, September.
  6. Jakob De Haan & Susanna Lundström & Jan-Egbert Sturm, 2006. "Market-oriented institutions and policies and economic growth: A critical survey," Journal of Economic Surveys, Wiley Blackwell, vol. 20(2), pages 157-191, 04.
  7. Alexander W. Butler & Larry Fauver, 2006. "Institutional Environment and Sovereign Credit Ratings," Financial Management, Financial Management Association, vol. 35(3), Autumn.
  8. Berggren, Niclas, 2003. "The Benefits of Economic Freedom: A Survey," Ratio Working Papers 4, The Ratio Institute.
  9. Marshall L. Stocker, 2005. "Equity Returns And Economic Freedom," Cato Journal, Cato Journal, Cato Institute, vol. 25(3), pages 583-594, Fall.
  10. James D . Gwartney & Randall G . Holcombe & Robert A . Lawson, 2006. "Institutions and the Impact of Investment on Growth," Kyklos, Wiley Blackwell, vol. 59(2), pages 255-273, 05.
  11. Richard Cantor & Frank Packer, 1996. "Determinants and impact of sovereign credit ratings," Economic Policy Review, Federal Reserve Bank of New York, issue Oct, pages 37-53.
  12. Joshua Hall & Robert Lawson, 2009. "Economic Freedom and Peace," Atlantic Economic Journal, International Atlantic Economic Society, vol. 37(4), pages 445-446, December.
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