Debt-threshold effect in sovereign credit ratings: New evidence from nonlinear panel smooth transition models

This paper formally tests the presence of threshold effect in sovereign credit ratings with respect to government debt level. As ad hoc methods have been used in the previous studies, we propose to implement a nonlinear panel smooth transition model where the appropriate debt-threshold value is estimated endogenously from the data. Our results reveal a strong regime-dependence in rating decisions, in the sense that the determinants of sovereign risk vary across different vulnerability levels.