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For everyone into general macroeconomics and those who are interested in the last sovereign crisis:
One of the main questions raised during the past years was whether the rating agencies’ downgrades of sovereigns lead to additional adverse effects on those sovereigns that have their ratings changed.

All the debating over sovereign rating made me ponder whether everyone is a hypochonder... and thus I studied this question above based on data from European countries (a panel of 26 countries and 17 years).

The main result: I found that there are two-way feedback effects between macroeconomic conditions and the sovereigns’ ratings. This, for example, means that a sovereign’s rating downgrade will lead to a reduction in economic growth, which then vice versa leads to that sovereign’s downgrade again.

This vicious cycle thus implies that rating changes can exaccerbate already existing problems of macroeconomic stability.

You can find the paper HERE, it is forthcoming in the journal Economic Modelling.

One thing that has been on my mind recently is the evolution of the monetary financial institutions (credit institutions and money market funds) in Luxembourg. For Luxembourg’s financial sector (and thus its GDP), private banking and asset management has always played a significant role. In the graph below I compare Luxembourg to Germany and France.

mfis

While the trend for Germany and France since September 2007 is somewhat mixed but definitely nothing to worry about, the evolution of MFIs in Luxembourg is worrisome to say the least. Basically – down since the crisis. Now – is this only a short-term trend or a new evolution?

Stay posted – I’ll write more on this.

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