The authors build on the findings froman earlier analysis, adding to the evidence base for thenotion that credit rating agencies contribute to fiscalsustainability. To do so, the authors focus on electionperiods when political pressures for fiscal expansions areheightened. The literature on political budget cyclesdocuments the tendency for budget deficits to increase inelection years as governments attempt to appear economicallycompetent by strategically providing additional publiclyfinanced goods or services, or by cutting taxes. A ratingdowngrade, however, signals the opposite of competence as itimplies an increase in the probability of sovereign default.Since credit ratings are widely observed - by financialmarkets as well as voters - they in effect serve as adisciplining device for fiscal policy not to submit toshort-term spending pressures, thus keeping it responsible.The authors find that: (1) governments going into anelection year immediately after a rating downgrade are 27percentage points more likely to lose at the polls; and (2)governments going into an election year with a negativerating outlook (indicating a higher likelihood of anear-term downgrade) run smaller budget deficits compared tocases with positive or stable outlooks. Ratings act likefiscal rules disciplining governments when they are morevulnerable to political pressures on the budget - as opposedto fiscal policies supporting longer-term economic growthand development objectives.
PDF
download
878987797
028-85220240
