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Rating Agencies and Sovereign Debt Rollover

  • Carlson Mark

    ()

    (Board of Governors of the Federal Reserve)

  • Hale Galina B

    ()

    (Federal Reserve Bank of San Francisco)

In order to explore how credit ratings may affect financial markets, we analyze a global game model of debt roll-over in which heterogeneous investors act strategically. We find that the addition of the rating agency has a non-monotonic effect on the probability of default and the magnitude of the response of capital flows to changes in fundamentals. We also establish that introducing a rating agency can bring multiple equilibria to a market that otherwise would have a unique equilibrium.

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Article provided by De Gruyter in its journal The B.E. Journal of Macroeconomics.

Volume (Year): 6 (2006)
Issue (Month): 2 (September)
Pages: 1-32

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Handle: RePEc:bpj:bejmac:v:topics.6:y:2006:i:2:n:8
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