Rating agencies, self-fulfilling prophecy and multiple equilibria? An empirical model of the European sovereign debt crisis 2009-2011
AbstractWe explore whether experiences during Europe's sovereign debt crisis support the notion that governments faced scenarios of self-fulfilling prophecy and multiple equilibria. To this end, we provide estimates of the effect of interest rates and other macroeconomic variables on sovereign debt ratings, and estimates of how ratings bear on interest rates. We detect a nonlinear effect of ratings on interest rates which is strong enough to generate multiple equilibria. The good equilibrium is stable, ratings are excellent and interest rates are low. A second unstable equilibrium marks a threshold beyond which the country falls into an insolvency trap from which it may only escape by exogenous intervention. Coefficient estimates suggest that countries should stay well within the A section of the rating scale in order to remain reasonably safe from being driven into eventual default.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by University of St. Gallen, School of Economics and Political Science in its series Economics Working Paper Series with number 1215.
Length: 35 pages
Date of creation: Jun 2012
Date of revision:
Eurozone; crisis; sovereign debt; credit spreads; bond yields; rating agencies; multiple equilibria; self-fulfilling prophecy;
Find related papers by JEL classification:
- F3 - International Economics - - International Finance
- G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
- H6 - Public Economics - - National Budget, Deficit, and Debt
This paper has been announced in the following NEP Reports:
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Rabah Arezki & Bertrand Candelon & Amadou Sy, 2011.
"Sovereign Rating News and Financial Markets Spillovers: Evidence from the European Debt Crisis,"
CESifo Working Paper Series
3411, CESifo Group Munich.
- Bertrand Candelon & Amadou N. R. Sy & Rabah Arezki, 2011. "Sovereign Rating News and Financial Markets Spillovers: Evidence from the European Debt Crisis," IMF Working Papers 11/68, International Monetary Fund.
- Alesina, Alberto F & Prati, Alessandro & Tabellini, Guido, 1989.
"Public Confidence and Debt Management: A Model and a Case Study of Italy,"
CEPR Discussion Papers
351, C.E.P.R. Discussion Papers.
- Alesina, A. & Prati, A. & Tabellini, G., 1989. "Public Confidence And Debt Management: A Model And A Case Study Of Italy," Papers 5, California Los Angeles - Applied Econometrics.
- Alberto Alesina & Alessandro Prati & Guido Tabellini, 1989. "Public Confidence and Debt Management: A Model and A Case Study of Italy," NBER Working Papers 3135, National Bureau of Economic Research, Inc.
- Mark A. Carlson & Galina B. Hale, 2005.
"Courage to Capital? A Model of the Effects of Rating Agencies on Sovereign Debt Role-over,"
Cowles Foundation Discussion Papers
1506, Cowles Foundation for Research in Economics, Yale University.
- Schuknecht, Ludger & von Hagen, Jürgen & Wolswijk, Guido, 2009.
"Government Bond Risk Premiums in the EU revisited: The Impact of the Financial Crisis,"
CEPR Discussion Papers
7499, C.E.P.R. Discussion Papers.
- von Hagen, Jürgen & Schuknecht, Ludger & Wolswijk, Guido, 2011. "Government bond risk premiums in the EU revisited: The impact of the financial crisis," European Journal of Political Economy, Elsevier, vol. 27(1), pages 36-43, March.
- Ludger Schuknecht & Jürgen von Hagen & Guido Wolswijk, 2010. "Government bond risk premiums in the EU revisited - the impact of the financial crisis," Working Paper Series 1152, European Central Bank.
- Manfred Gärtner & Björn Griesbach & Florian Jung, 2011.
"PIGS or Lambs? The European Sovereign Debt Crisis and the Role of Rating Agencies,"
International Advances in Economic Research,
Springer, vol. 17(3), pages 288-299, August.
- Gärtner, Manfred & Griesbach, Bjoern & Jung, Florian, 2011. "PIGS or Lambs? The European Sovereign Debt Crisis and the Role of Rating Agencies," Economics Working Paper Series 1106, University of St. Gallen, School of Economics and Political Science.
- Harold L. Cole & Timothy J. Kehoe, 1998.
"Self-fulfilling debt crises,"
211, Federal Reserve Bank of Minneapolis.
- António Afonso & Pedro Gomes & Philipp Rother, 2007.
"What “hides” behind sovereign debt ratings?,"
Working Paper Series
711, European Central Bank.
- International Monetary Fund, 2012. "Are Rating Agencies Powerful? An Investigation into the Impact and Accuracy of Sovereign Ratings," IMF Working Papers 12/23, International Monetary Fund.
- Cole, Harold L. & Kehoe, Timothy J., 1996. "A self-fulfilling model of Mexico's 1994-1995 debt crisis," Journal of International Economics, Elsevier, vol. 41(3-4), pages 309-330, November.
- Ernan Haruvy & Yaron Lahav & Charles N. Noussair, 2007. "Traders' Expectations in Asset Markets: Experimental Evidence," American Economic Review, American Economic Association, vol. 97(5), pages 1901-1920, December.
Blog mentionsAs found by EconAcademics.org, the blog aggregator for Economics research:
- Ideen und Interessen
by Tobias Straumann in Never mind the markets on 2012-07-31 04:00:32
- La rolo de la taksagentejoj en la e?rokrizo
by Ri?o in Riŝo's blog on 2012-07-31 04:16:59
- Lese-Tipps: spannende Hintergründe zur Finanzkrise
by Steffen Greschner in x Politics on 2012-07-31 17:42:18
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Martina Flockerzi).
If references are entirely missing, you can add them using this form.