Credit Rating Dynamics: Evidence from a Natural Experiment

The paper investigates the behaviour of credit rating agencies (CRAs) using a natural experiment in monetary policy. Specifically, it exploits the corporate QE of the Eurosystem and its rating-based specific design which generates exogenous variation in the probability for a bond of becoming eligible for outright purchases. The authors show that after the launch of the policy, rating upgrades were mostly noticeable for bonds initially located below, but close to, the eligibility frontier. In line with the theory, rating activity is concentrated precisely on the territory where the incentives of market participants are expected to be more sensitive to the policy design. Complementing the evidence on the activeness of non-standard measures, the findings contribute to better assessing the consequences of the explicit (but not exclusive) reliance on CRAs ratings by central banks when designing monetary policy.