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The relation between sovereign credit rating revisions and economic growth

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  • Chen, Sheng-Syan
  • Chen, Hsien-Yi
  • Chang, Chong-Chuo
  • Yang, Shu-Ling

Abstract

A country’s economic growth exhibits a significant response to sovereign rating changes: a one-notch upgrade (downgrade) causes an increase (decline) of about 0.6% (0.3%) in re-rated countries’ five-year average annual growth rates. The results hold after accounting for other determinants of economic growth and potential endogeneity problems, and are robust to the use of quarterly data. Changes in country rating affect economic growth via the interest-rate and capital-flow channels: narrower sovereign bond yield spreads and increased capital inflows are associated with upgrades, which stimulate re-rated countries’ economic performance, and the converse holds for downgrades.

Suggested Citation

  • Chen, Sheng-Syan & Chen, Hsien-Yi & Chang, Chong-Chuo & Yang, Shu-Ling, 2016. "The relation between sovereign credit rating revisions and economic growth," Journal of Banking & Finance, Elsevier, vol. 64(C), pages 90-100.
  • Handle: RePEc:eee:jbfina:v:64:y:2016:i:c:p:90-100
    DOI: 10.1016/j.jbankfin.2015.10.012
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    More about this item

    Keywords

    Economic growth; Sovereign credit rating revision; Capital flows;
    All these keywords.

    JEL classification:

    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • F62 - International Economics - - Economic Impacts of Globalization - - - Macroeconomic Impacts
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • O47 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Empirical Studies of Economic Growth; Aggregate Productivity; Cross-Country Output Convergence

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