Olivier Blanchard : Ratings, Debt, and Deficits: An Exploration

Abstract: We look at the effects of debt and primary fiscal balances on sovereign credit ratings through the lens of a simple model. We find that the ratings differ from the implications

of the model in three important ways. They give much more weight to debt relative

to forecast primary balances. They understate the effects of the difference between the

interest rate and the growth rate. They give a very large role to country effects. For the

same level of debt and forecast primary balances, they imply extremely different ratings

across countries, and imply extremely different levels of debt needed to reach a given

rating.