Does the Cost of Government Borrowing Transmit Sovereign Debt Credit Ratings Downgrades Shocks to Credit Growth?

Abstract

This chapter assesses whether the indirect effects of the sovereign debt credit ratings downgrades shocks are transmitted via the cost of government debt and borrowing. Are sovereign debt credit ratings downgrades shocks transmitted via the cost of government debt? Evidence shows that the sovereign debt credit ratings downgrades shocks are transmitted via the cost of government debt to impact economic activity. This is because the sovereign debt credit ratings downgrades shocks increase the cost of government debt and borrowing as well as the ratio of gross loan debt to GDP. Thus, evidence shows that the cost of government debt and borrowing is a potent transmitter of the sovereign debt credit ratings downgrades shocks. The results imply that policymakers should implement policies that avert sovereign debt credit ratings downgrades. The sovereign debt credit ratings downgrades shocks spill-over into credit growth via the cost of government debt and borrowing channel.