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Bias or ignorance? The politics and economics behind sovereign credit ratings

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  • Dähler, Timo
Abstract
Given that sovereign bond markets may be vulnerable to multiple equilibria and self-fulfilling prophecies, a debate exists over whether and in what way credit rating agencies (CRAs) are politically biased and may weaponize sovereign credit ratings. Recent research by Fuchs and Gehring (2017) suggests that CRAs are not biased in favor of countries which are geo-politically aligned with their home country. In this paper, I argue that such a bias exists and that it should manifest empirically once two features of the global economy are controlled for: hidden debt owed to China and the global network of central bank swap line arrangements. To provide support for my argument, I first replicate the results reported by Fuchs and Gehring and then extend the analysis in several ways to account for these two features that have recently emerged in global finance to show that an in-group bias is present across major CRAs.

Suggested Citation

  • Dähler, Timo, 2020. "Bias or ignorance? The politics and economics behind sovereign credit ratings," MPRA Paper 103965, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:103965
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    References listed on IDEAS

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    More about this item

    Keywords

    home bias; in-group bias; sovereign credit ratings; credit rating agencies; international finance;
    All these keywords.

    JEL classification:

    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • F65 - International Economics - - Economic Impacts of Globalization - - - Finance
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

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