Working Paper: CEPR ID: DP9150
Authors: Vito Polito; Michael R. Wickens
Abstract: A methodology for generating sovereign credit ratings based on macroeconomic theory is proposed. This is applied to quarterly U.S. data from 1970 to 2011. Over this period the official credit rating of U.S. Treasury securities has been of the highest quality. In contrast, the model-based measure finds that there are two clear instances in which the U.S. sovereign credit rating, if evaluated on the basis of economic fundamentals, should have been have been downgraded: the first oil crisis of the 1970s and in the aftermath of the Lehman collapse in 2008. This result is robust to several alternative views on the maximum borrowing capacity of the U.S. economy.
Keywords: credit risk; default probability; fiscal limits; sovereign risk
JEL Codes: E62; H30; H60
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| US sovereign credit rating (F34) | economic fundamentals (E25) |
| economic fundamentals (E25) | US sovereign credit rating (F34) |
| debt-GDP limit (H63) | default probability (C46) |
| default probability (C46) | US sovereign credit rating (F34) |
| economic events (G14) | perceptions of creditworthiness (G21) |
| model-based measure of credit ratings (E17) | US government's ability to meet financial obligations (H63) |