Output spillovers from changes in sovereign credit ratings

• We examine how a sovereign rating revision of one country affects the output growth of other countries.
• Positive and negative rating revisions both lead to adverse forecast revisions in other countries' output growth.
• Output spillovers are transmitted through trade and financial linkages between event and non-event countries.
• A predominance of differential spillovers leads upgrades to produce adverse output effects for other countries.
• A predominance of common spillovers leads downgrades to produce adverse output effects for other countries.

This research examines how a sovereign rating revision of one country influences the economic growth rates of other countries. Rating revisions have significant output spillover effects: A one-notch upgrade (downgrade) prompts on average a significant downward revision of about 0.03% (0.07%) in the consensus forecast of annual economic growth rates of other countries in the two-month period after the event. The spillovers are transmitted through direct and indirect trade and financial linkages between event and non-event countries. The evidence indicates that a predominance of differential (common) spillovers leads upgrades (downgrades) to produce adverse output effects for other countries.