Rating agencies, self-fulfilling prophecy and multiple equilibria? An empirical model of the European sovereign debt crisis 2009-2011 Manfred Gärtner, Björn Griesbach June 2012 Discussion Paper no. 2012-15 School of Economics and Political Science, University of St. Gallen Department of Economics Editor: Martina Flockerzi University of St. Gallen School of Economics and Political Science Department of Economics Varnbüelstrasse 19 CH-9000 St. Gallen Phone +41 71 224 23 25 Fax +41 71 224 31 35 Email
[email protected] Publisher: School of Economics and Political Science Department of Economics University of St. Gallen Varnbüelstrasse 19 CH-9000 St. Gallen Phone +41 71 224 23 25 Electronic Publication: Fax +41 71 224 31 35 http://www.seps.unisg.ch Rating agencies, self-fulfilling prophecy and multiple equilibria? An empirical model of the European sovereign debt crisis 2009-2011 Manfred Gärtner, Björn Griesbach Authors’ addresses: Manfred Gärtner Institute of Economics (FGN-HSG) University of St.Gallen Bodanstr. 1 CH-9000 St. Gallen Email
[email protected] Website http://www.fgn.unisg.ch Björn Griesbach Institute of Economics (FGN-HSG) University of St.Gallen Bodanstr. 1 CH-9000 St. Gallen Email
[email protected] Website http://www.fgn.unisg.ch Abstract We explore whether experiences during Europe's sovereign debt crisis support the notion that governments faced scenarios of self-fulfilling prophecy and multiple equilibria. To this end, we provide estimates of the effect of interest rates and other macroeconomic variables on sovereign debt ratings, and estimates of how ratings bear on interest rates. We detect a nonlinear effect of ratings on interest rates which is strong enough to generate multiple equilibria.