Credit Rating Dynamics: Evidence from a Natural Experiment

83 Pages Posted: 1 May 2019

See all articles by Nordine Abidi

Nordine Abidi

International Monetary Fund

Matteo Falagiarda

European Central Bank (ECB)

Ixart Miquel-Flores

European Central Bank (ECB); Frankfurt School of Finance & Mangement.

Date Written: April 29, 2019

Abstract

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

Abidi, Nordine and Falagiarda, Matteo and Miquel-Flores, Ixart, Credit Rating Dynamics: Evidence from a Natural Experiment (April 29, 2019). ECB Working Paper No. 2274 (2019); ISBN 978-92-899-3536-4 , Available at SSRN: https://ssrn.com/abstract=3380232

Nordine Abidi

International Monetary Fund ( email )

700 19th Street, N.W.
Washington DC
United States

Matteo Falagiarda (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Ixart Miquel-Flores

European Central Bank (ECB) ( email )

Sonnemannstraße 20
Frankfurt am Main, 60325
Germany

Frankfurt School of Finance & Mangement. ( email )

Adickesallee 32-34
Frankfurt am Main, 60322
Germany

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