Rating for government debt and economic stability

In this study, we incorporate a credit rating scheme for government debt into a standard dynamic general equilibrium model. We then analyze the relationship between a credit rating system and economic stability. The main result demonstrates the existence of an unstable rating system. Such a system would be generated by information asymmetries between rating agencies and government stances regarding debt. We also find that if the sensitivity of credit ratings to debt-to-GDP ratio is high, then it could lead to economic instability in the sense that this ratio explodes.