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The relation between sovereign credit rating revisions and economic growth

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

Journal of Banking & Finance, 2016, vol. 64, issue C, 90-100

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.

Keywords: Economic growth; Sovereign credit rating revision; Capital flows (search for similar items in EconPapers)
JEL-codes: F34 F62 G24 O47 (search for similar items in EconPapers)
Date: 2016
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Handle: RePEc:eee:jbfina:v:64:y:2016:i:c:p:90-100