Promotion and Relegation between Country Risk Classes as Maintained by Country Risk Rating Agencies1

Credit rating agency assessments of sovereign risk bear weak statistical association with the quality of country policies. This paper demonstrates that where endogenous responses by policy makers to credit rating outcomes, and the degree of responsiveness of credit rating agencies to policy changes are accounted for, strong associations between policy quality and ratings should be present. The paper verifies these associations on panel data for 60 countries over the 1980-2012 period. JEL Codes: G23, G24, G14.