Working Paper: CEPR ID: DP9378
Authors: Vito Polito; Michael R. Wickens
Abstract: The immediate background to this paper is the downgrade of the U.K.'s credit rating in February 2013, the market's view that this should have occurred earlier and the emphasis in fiscal policy on reducing debt rather than recovery from recession. We propose a measure of the U.K. sovereign credit rating based on an open economy macroeconomic model that is simple to compute and easily automated. Whether based on an ad hoc debt-GDP limit or a DSGE model of an open economy, our measure downgrades the U.K.'s sovereign credit rating from the middle of 2008. From 2010 the rating improves and is nearly restored to triple-A by 2012.
Keywords: credit ratings; debt; default
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 |
|---|---|
| poor economic outlook (E66) | downgrade of UK's credit rating (F34) |
| debt-to-GDP ratio exceeding certain thresholds (F34) | downgrade of UK's credit rating (F34) |
| poor economic outlook + debt-to-GDP ratio (E66) | downgrade of UK's credit rating (F34) |
| debt-to-GDP ratio (H68) | probability of default (G33) |