Dealing with destabilizing 'market discipline'
By: Daniel Cohen, Richard Portes.
Contributors: Portes, Richard.; National Bureau of Economic Research.
Series: NBER working paper series ;; working paper 10533; Working paper series (National Bureau of Economic Research : Online) ;; working paper no. 10533.
Publisher: National Bureau of Economic Research
Published: 2004
Place of publication: Cambridge, MA
Language: eng
Format: Electronic resource
Subjects: Interest rates.; Economic stabilization.; Debts, External.; Capital movements.
Description: "If interest rates (country spreads) rise, debt can rapidly be subject to a snowball effect, which then becomes self-fulfilling with regard to the fundamentals themselves.  This is a market imperfection, because we cannot be confident that the unaided market will choose the good equilibrium' over the bad equilibrium'.  We see here a fundamental flaw in the process of market discipline.  We propose a policy intervention to deal with this structural weakness in the mechanisms of international capital flows.  This is based on a simple taxonomy that enables us to break down the origin of crises into three components: a crisis of confidence (spreads and currency crisis), a crisis of fundamentals (real growth rate), and a crisis of economic policy (primary deficit).  The policy would seek to short-circuit confidence crises, partly by using IMF support to improve ex ante incentives"--National Bureau of Economic Research web site.
Notes: Includes bibliographical references.
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