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The power and influence of rating agencies with insights into their misuse

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  • Basu, Kaushik
  • Sun, Haokun

Abstract

The paper investigates the source of power and influence of agencies engaged in rating and ranking nations. Their power and knowledge are puzzling since the economics profession is itself split about what constitutes good fundamentals for an economy. Based on some stylized facts of the Ease of Doing Business rankings, the paper constructs a model that shows ratings can contribute to creating a focal point for investors, prompting behavior that makes the ratings come out right in retrospect. The paper then comments on the real-world implications of the model, possible extensions of the theory, and how the power to create focal points can be misused by organizations engaged in rating and ranking nations.

Suggested Citation

  • Basu, Kaushik & Sun, Haokun, 2022. "The power and influence of rating agencies with insights into their misuse," Economic Modelling, Elsevier, vol. 109(C).
    • Handle: RePEc:eee:ecmode:v:109:y:2022:i:c:s0264999322000098
    DOI: 10.1016/j.econmod.2022.105763
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    Cited by:

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    2. Aggarwal, Nidhi & Singh, Manish K. & Thomas, Susan, 2023. "Do decreases in Distance-to-Default predict rating downgrades?," Economic Modelling, Elsevier, vol. 129(C).
    3. Ben Hmiden, Oussama & Tatoutchoup, Didier & Nguimkeu, Pierre & Avelé, Donatien, 2024. "Discrepancy and cross-regional bias in sovereign credit ratings: Analyzing the role of public debt," Economic Modelling, Elsevier, vol. 131(C).

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