Hassan, Gazi and Wu, Eliza (2012): Sovereign country rating, growth volatility and financial crisis.
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Using monthly data from January 1996 up to May 2010 for a panel of 76 developed and emerging economies and adopting an instrumental variable estimation technique by correcting for both heterogeneity and endogeneity (correlation between the regressors and the idiosyncratic error) using the generalized two-stage least squares (G2SLS, EC2SLS) procedure method suggested by Balestra and Varadharajan-Krishnakumar (1987) and Baltagi (1995), this paper provides empirical evidence that an alternative channel via which growth volatility is reduced is through changes in sovereign country ratings. The paper also provides a new insight on the effect of global financial crisis (GFC) that it has contributed towards increased macroeconomic volatility by weakening this volatility reducing effect of sovereign country rating. Finally acknowledging the simultaneity between rating and volatility where output volatility may be a determining factor for sovereign country rating, the paper adopts a system approach and uses three stage least square (3SLS) estimator and finds that volatility reducing effect of country credit rating is robust. The channel via which sovereign rating changes affect growth volatility is through sovereign credit default swap (CDS) spread and its volatility.
|Item Type:||MPRA Paper|
|Original Title:||Sovereign country rating, growth volatility and financial crisis|
|Keywords:||Growth volatility, sovereign country rating, global financial crisis, monetary policy, G2SLS, EC2SLS, 3SLS|
|Subjects:||C - Mathematical and Quantitative Methods > C5 - Econometric Modeling
E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E52 - Monetary Policy
C - Mathematical and Quantitative Methods > C3 - Multiple or Simultaneous Equation Models ; Multiple Variables > C33 - Panel Data Models ; Spatio-temporal Models
|Depositing User:||Gazi M. Hassan|
|Date Deposited:||16. Jul 2012 13:21|
|Last Modified:||21. Oct 2015 15:16|
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