The Bail-In Problem: Systematic Goals, Ad Hoc Means

In this paper we analyze the recent efforts of the international financial institutions to limit the moral hazard created by their assistance to crisis countries. We question the wisdom of the case-by-case approach taken in Pakistan, Ecuador, Romania and Ukraine. We show that because default and restructuring are so painful and costly, it is simply not time consistent for the IFIs to plan to stand aside if the markets refuse to roll over maturing claims, restructure problem debts, or provide new money. Because these realities create an incentive to disburse even if investors fail to comply, the IFIs are then placed in the position of having to back down on their previous conditionality, which undermines their credibility. And since investors are aware of these facts, their behavior is unlikely to be modified by the IFIs' less-than-credible statements of intent. Hence, this approach to bailing in the private sector' will not work. Fortunately, there is an alternative: introducing collective-action clauses into loan agreements. This, and not ad hoc efforts to bail in the private sector, is a forward-looking solution to the moral hazard problem.

The Blind Man's Subsidies

We model the introduction of hard budget constraints in a transition economy. The model, set in continuous time, is designed to address the interaction between the hardening of such constraints and the speed of restructuring in the industrial sector. We emphasize the impact policy changes will have on the old capital stock with respect to the rate of firm's bankruptcies on the one hand, and to increases in aggregate labor productivity on the other. We then extend the analysis to study the speed with which 'de novo' investment will take place, under alternative government policies.Economic Dynamics, Growth Theory, Economic Development, Transition Economies

Economic Discontent versus Social Commitment in Economic Development

The paper investigates the role of social cohesion in economic development. We capture 'social cohesion' as society's willingness to accept lower wages to increase employment, and as its willingness to offer benefit payments to the unemployed. The lower the minimum wage rate and the higher the welfare payments, the more cohesive the society, and vice versa. We compare two economies which differ only in this respect. We analyze how they react to shocks of different magnitudes. We show that for minor disturbances the less cohesive economy exhibits superior performance, while the reverse becomes true as the size of the shock increases. The Central and Eastern European transition economies exemplify the argument.Economic Development, Growth Theory, Transition Economies

The long- and short-run impact of oil price changes on major global economies

In the context of the recent slump in global oil prices, the paper investigates the effect of oil price shocks on the economic performance of 51 individual OECD and OPEC economies. We propose an error correction model which allows us to differentiate between short- and longrun price effects. For robustness, structural breaks and potential asymmetries are incorporated. Our approach is particularly interesting, since economic performance is not only measured by GDP, but also by equity indices from the MSCI family. The equity indices provide valuable insights into financial transmission mechanisms, in addition to macroeconomic channels, at much higher frequency than conventional GDP data. We are able to present robust estimates for the severity of oil price shocks for individual economies and thereby identify winners and losers under the current oil price regime

Nicholas Johannsen and Keynes finance motive

Summary in GermanSIGLEAvailable from Bibliothek des Instituts fuer Weltwirtschaft, ZBW, Duesternbrook Weg 120, D-24105 Kiel / FIZ - Fachinformationszzentrum Karlsruhe / TIB - Technische InformationsbibliothekDEGerman