Do sovereign ratings lead to a self-fulfilling prophecy?

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For everyone into general macroeconomics and those who are interested in the last sovereign crisis:
One of the main questions raised during the past years was whether the rating agencies’ downgrades of sovereigns lead to additional adverse effects on those sovereigns that have their ratings changed.

All the debating over sovereign rating made me ponder whether everyone is a hypochonder... and thus I studied this question above based on data from European countries (a panel of 26 countries and 17 years).

The main result: I found that there are two-way feedback effects between macroeconomic conditions and the sovereigns’ ratings. This, for example, means that a sovereign’s rating downgrade will lead to a reduction in economic growth, which then vice versa leads to that sovereign’s downgrade again.

This vicious cycle thus implies that rating changes can exaccerbate already existing problems of macroeconomic stability.

You can find the paper HERE, it is forthcoming in the journal Economic Modelling.

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