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.