TY  - JOUR
AU  - Cohen,Daniel
AU  - Portes,Richard
TI  - Dealing with Destabilizing 'Market Discipline'
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 10533
PY  - 2004
Y2  - May 2004
UR  - http://www.nber.org/papers/w10533
L1  - http://www.nber.org/papers/w10533.pdf
N1  - Author contact info:
Daniel Cohen
ENS-CEPREMAP
48, Boulevard Jourdan
75014 Paris
FRANCE
E-Mail: no email available

Richard Portes
London Business School
Regent's Park
London NW1 4SA
UNITED KINGDOM
Tel: 44 (0)  20 7000 8424
Fax:  44 (0) 20 7000 8401
E-Mail: rportes@london.edu
AB  - 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.
ER  -