Credit Rating Dynamics: Evidence from a Natural Experiment
83 Pages Posted: 1 May 2019
Date Written: April 29, 2019
This paper investigates the behaviour of credit rating agencies (CRAs) using a natural experiment in monetary policy. Speciﬁcally, we exploit the corporate QE of the Eurosystem and its rating-based speciﬁc design which generates exogenous variation in the probability for a bond of becoming eligible for outright purchases. We show that after the launch of the policy, rating upgrades were mostly noticeable for bonds initially located below, but close to, the eligibility frontier. In line with the theory, rating activity is concentrated precisely on the territory where the incentives of market participants are expected to be more sensitive to the policy design. Complementing the evidence on the eﬀectiveness of non-standard measures, our ﬁndings contribute to better assessing the consequences of the explicit (but not exclusive) reliance on CRAs ratings by central banks when designing monetary policy.
Keywords: credit rating agencies, monetary policy
JEL Classification: E44, E52, E58, G24, G30
Suggested Citation: Suggested Citation