Dealing with Destabilizing 'Market Discipline'
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.
|Date of creation:||Feb 2004|
|Date of revision:|
|Contact details of provider:|| Postal: |
Phone: 44 - 20 - 7183 8801
Fax: 44 - 20 - 7183 8820
|Order Information:|| Email: |
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Richard Cantor & Frank Packer, 1995. "Sovereign credit ratings," Current Issues in Economics and Finance, Federal Reserve Bank of New York, vol. 1(Jun).
- Cohen, Daniel, 2001.
"The HIPC Initiative: True and False Promises,"
Wiley Blackwell, vol. 4(3), pages 363-80, Winter.
- Fischer, Stanley, 1999. "Reforming the International Financial System," Economic Journal, Royal Economic Society, vol. 109(459), pages F557-76, November.
- John Williamson, 2000. "The Role of the IMF: A Guide to the Reports," Policy Briefs PB00-5, Peterson Institute for International Economics.
- Peter H. Lindert & Peter J. Morton, 1989.
"How Sovereign Debt Has Worked,"
in: Developing Country Debt and the World Economy, pages 225-236
National Bureau of Economic Research, Inc.
- Harold L. Cole & Timothy J. Kehoe, 1998.
"Self-Fulfilling Debt Crises,"
Levine's Working Paper Archive
114, David K. Levine.
- Martin Uribe & Vivian Z. Yue, 2003.
"Country Spreads and Emerging Countries: Who Drives Whom?,"
NBER Working Papers
10018, National Bureau of Economic Research, Inc.
- Martin Uribe & Vivian Yue, 2004. "Country spreads and emerging countries: who drives whom?," Proceedings, Federal Reserve Bank of San Francisco, issue Jun.
- Uribe, Martin & Yue, Vivian Z., 2006. "Country spreads and emerging countries: Who drives whom?," Journal of International Economics, Elsevier, vol. 69(1), pages 6-36, June.
- Calvo, Guillermo A, 1988. "Servicing the Public Debt: The Role of Expectations," American Economic Review, American Economic Association, vol. 78(4), pages 647-61, September.
- Antonio Afonso, 2003. "Understanding the determinants of sovereign debt ratings: Evidence for the two leading agencies," Journal of Economics and Finance, Springer, vol. 27(1), pages 56-74, March.
When requesting a correction, please mention this item's handle: RePEc:cpr:ceprdp:4280. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ()
If references are entirely missing, you can add them using this form.