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Fiscal Transparency, Fiscal Performance and Credit Ratings

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  • Elif Arbatli
  • Julio Escolano

Abstract

This paper investigates the effect of fiscal transparency on market assessments of sovereign risk, as measured by credit ratings. It measures this effect through a direct channel (uncertainty reduction) and an indirect channel (better fiscal policies and outcomes), and it differentiates between advanced and developing economies. Fiscal transparency is measured by an index based on the IMF’s Reports on the Observance of Standards and Codes (ROSCs). We find that fiscal transparency has a positive and significant effect on ratings, but it works through different channels in advanced and developing economies. In advanced economies the indirect effect of transparency through better fiscal outcomes is more significant whereas for developing economies the direct uncertainty-reducing effect is more relevant. Our results suggest that a one standard deviation improvement in fiscal transparency index is associated with a significant increase in credit ratings: by 0.7 and 1 notches in advanced and developing economies respectively.
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Suggested Citation

  • Elif Arbatli & Julio Escolano, 2015. "Fiscal Transparency, Fiscal Performance and Credit Ratings," Fiscal Studies, Institute for Fiscal Studies, vol. 36, pages 237-270, June.
  • Handle: RePEc:ifs:fistud:v:36:y:2015:i::p:237-270
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    References listed on IDEAS

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    1. Alesina, Alberto & Hausmann, Ricardo & Hommes, Rudolf & Stein, Ernesto, 1999. "Budget institutions and fiscal performance in Latin America," Journal of Development Economics, Elsevier, vol. 59(2), pages 253-273, August.
    2. Alt, James E. & Lassen, David Dreyer, 2006. "Fiscal transparency, political parties, and debt in OECD countries," European Economic Review, Elsevier, vol. 50(6), pages 1403-1439, August.
    3. Murray Petrie, 2003. "Promoting Fiscal Transparency the Complementary Roles of the Imf, Financial Markets and Civil Society," IMF Working Papers 03/199, International Monetary Fund.
    4. International Monetary Fund, 2005. "Fiscal Transparency and Economic Outcomes," IMF Working Papers 05/225, International Monetary Fund.
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    Cited by:

    1. Carmen, COMANICIU, 2016. "Some Coordinates Concerning The Fiscal Transparency From Romania," Management Strategies Journal, Constantin Brancoveanu University, vol. 31(1), pages 60-67.
    2. Cicatiello, Lorenzo & De Simone, Elina & Gaeta, Giuseppe Lucio, 2016. "Political determinants of fiscal transparency: a panel data empirical investigation," MPRA Paper 72609, University Library of Munich, Germany.
    3. Lasse Aaskoven, 2016. "Fiscal Transparency, Elections and Public Employment: Evidence from the OECD," Economics and Politics, Wiley Blackwell, vol. 28(3), pages 317-341, November.
    4. Luitel, Prabesh & Vanpée, Rosanne & De Moor, Lieven, 2016. "Pernicious effects: How the credit rating agencies disadvantage emerging markets," Research in International Business and Finance, Elsevier, vol. 38(C), pages 286-298.
    5. Martin Luis Alton & Sanjay Agarwal & Vera Songwe, 2013. "A Local Budget Transparency Index for Cameroon's Local Councils : Insights from a Benchmarking Exercise," World Bank Other Operational Studies 20130, The World Bank.
    6. repec:eee:joecas:v:13:y:2016:i:c:p:35-44 is not listed on IDEAS
    7. repec:spr:ecogov:v:18:y:2017:i:4:d:10.1007_s10101-017-0192-x is not listed on IDEAS

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