Bailing in the private sector : on the adequate design of international bond contracts

During the last decade, there has been a significant bias towards bond financing on emerging markets, with private investors relying on a bail-out of bonds by the international community. The bias has been a main cause for recent excessive fragility of international capital markets. The paper shows how collective action clauses in bonds contracts help to involve the private sector in risk sharing. It argues that such clauses, as a market based instrument, will raise spreads for emerging market debt and so help to correct a market failure towards excessive bond finance. Recent pressure by the IMF to involve the private sector is facing a conflict between the principle to honour existing contracts and the principle of equal treatment of bondholders

Gradualism vs Cold Turkey : how to establish credibility for the ECB

The paper analyzes the incentive for the ECB to establish reputation by pursuing a restrictive policy right at the start of its operation. The bank is modelled as risk averse with respect to deviations of both inflation and output from her target. The public, being imperfectly informed about the bank’s preferences uses observed inflation as (imperfect) signal for the unknown preferences. Under linear learning rules - which are commonly used in the literature - a gradual build up of reputation is the optimal response. The paper shows that such a linear learning rule is not consistent with efficient signaling. It is shown that in a game with efficient signaling, a cold turkey approach - allowing for deflation - is optimal for a strong bank - accepting high current output losses at the beginning in order to demonstrate its toughness. JEL classification: D 82, E 58Die Arbeit untersucht die Anreize der Europäischen Zentralbank, in der Startphase durch restriktive Politik Reputation aufzubauen. Die Öffentlichkeit kennt die Präferenzen der Zentralbank nicht; sie verwendet die beobachtete Inflationsrate als (imperfektes) Signal. Wird eine lineare Lernregel unterstellt - der Standardfall in der Literatur - erweist es sich als optimal, hohe Inflationserwartungen zumindest teilweise zu akkommodieren und so Reputation nur schrittweise aufzubauen. Die Arbeit zeigt aber, daß eine solche lineare Lernregel mit effizientem Signalverhalten nicht konsistent ist. Bei effizientem Signalisieren kann es für eine harte Zentralbank optimal sein, in der Startphase durch eine sehr restriktive, deflationäre Politik ihre Präferenzen zu offenbaren. JEL classification: D 82, E 5

Theoretical Update on Rare K Decays

We review the status of rare kaon decays, concentrating on modes with sensitivity to short-distance flavour physics.Comment: Invited talk presented at Daphne 99, Frascati, Nov. 1999, 13 pages, 3 figure

On our Knowledge of Markets for Knowledge ― A Survey

At the Lisbon Summit 2000 the EU set herself the goal of transforming the European Union by 2010 into “the most competitive and dynamic knowledge based economy in the world capable of sustainable economic growth with more and better jobs and greater social cohesion”. I take this statement as a starting point for this paper for two reasons: On the one hand it acknowledges the crucial role of knowledge in an advanced economy. On the other hand, it raises the question what needs to be done in order to achieve this ambitious goal. In particular, since the EU is also committed to a market economy and the maintenance of competition the question arises how well markets function with respect to the creation and distribution of knowledge, and what measures may be required, either to support the market mechanism or to replace it by some other institutions. This article deals with the ?rst question and offers a survey of the problems encountered in markets dealing with knowledge. In the next section I discuss briefly the role of knowledge and information in economics. After that I point out a few difficulties with finding a precise and generally accepted definition of knowledge. Section 4 is the core of the article and discusses various types of market failures which might occur when the commodity produced and traded is knowledge. I conclude with a few suggestions for further research