Showing papers on "Exit strategy published in 2010"

IPOs versus Acquisitions and the Valuation Premium Puzzle: A Theory of Exit Choice by Entrepreneurs and Venture Capitalists

Abstract: We analyze a private firm's choice of exit mechanism between IPOs and acquisitions, and provide a resolution to the "IPO valuation premium puzzle." The private firm is run by an entrepreneur and a venture capitalist (insiders) who desire to exit partially from the firm. A crucial factor driving their exit choice is competition in the product market: while a stand-alone firm has to fend for itself after going public, an acquirer is able to provide considerable support to the firm in product market competition. A second factor is the difference in information asymmetry characterizing the two exit mechanisms. Finally, the private benefits of control accruing post-exit to the entrepreneur and the bargaining power of outside investors versus firm insiders are also different across the two mechanisms. We analyze two different situations: the first, where the entrepreneur can make the exit choice alone (independent of the venture capitalist) and the second, where the entrepreneur can make the exit choice only with the concurrence of the venture capitalist. We derive a number of testable implications regarding insiders' exit choice between IPOs and acquisitions and about the IPO valuation premium puzzle.

Skills supply and demand in Europe medium-term forecastup to 2020

Abstract: Europeʼs citizens and businesses have been hit severely by the economic slump. To recover speedily and tackle long-term challenges, we must unleash Europeʼs potential. But Europeʼs youth unemployment is soaring and its share of low-qualified people, who have fewer chances to develop their skills than others, is high. To compete in the global market, Europe needs to generate higher quality and more innovative products and services. Higher productivity is essential to maintain our social model. New jobs and new skills are emerging, as technology, innovation, demographic change and climate strategies generate new demands. Downturn and exit strategies are accelerating economic restructuring. This will affect the type of skills needed.

Monetary Policy Responses to the Crisis and Exit Strategies

Abstract: Central banks have responded with exceptional vigour to the crisis by using their traditional interest-rate tools to their limits and deploying a wide range of unconventional measures. This paper documents these responses in a systematic way, reviews the evidence about their impact, and discusses the need to exit from these measures. Unconventional monetary policy measures appear to have been broadly successful in terms of improving conditions in financial markets and stabilising the real economy. In line with the improvement in functioning of financial markets, however, these unconventional measures should be gradually removed. Given the considerable changes in the size and composition of central banks' balance sheets, the exit will likely involve the combination of various tools. More challenging questions surround the decisions of when and how fast the current exceptional amount of stimulus should be reduced and then eliminated. A particularly important goal will be to preserve the hard-won anchoring of inflation expectations and dissipate any hypothetical fears that central banks? greater risk exposure and purchases of bonds issued or backed by governments might have reduced their independence regarding monetary policy decisions.

The impact of motivation and causation and effectuation approaches on exit strategies

Abstract: Although exit is a central part of the entrepreneurial process, most of the entrepreneurship literature has focused on the entry and growth phases of a business. Our research examines the extent to which the entrepreneur’s personal motivations and venture development processes impact exit strategies. Specifically we examine the link between extrinsic and intrinsic motivation and causation and effectuation processes and an entrepreneur’s intended exit strategy. Our results indicate that extrinsically-motivated entrepreneurs are more likely to consider an IPO strategy and less likely to consider an independent sale. Intrinsically-motivated entrepreneurs are less likely to consider an IPO or liquidation and more likely to intend to exit through an independent sale. Entrepreneurs employing causation processes are more likely to consider an IPO strategy and less likely to intend to exit via liquidation. The sub-dimensions of effectuation are differentially related to exit strategies. Experimentation is positively related to an IPO strategy while affordable loss is positively, and flexibility negatively, related to liquidation.

Expanded guarantees for banks: Benefits, costs and exit issues

Abstract: This article argues that the expansion of existing and the introduction of new guarantees for financial institutions has been a key element of the policy response to the recent financial crisis. Essentially, the government expanded its role as the provider of the safety net for banks by adopting the function of a guarantor of last resort. Among the various policy response measures, the expansion of guarantees has the benefit of entailing lower upfront fiscal costs relative to other options. Guarantees are not without cost however. Even if they do not generate significant upfront fiscal costs, they create contingent fiscal liabilities. Other potential costs include those arising from distortions to competition and incentives (moral hazard). For example, there may be a perception that similar guarantees will always be made available at low costs. The fact that the expansion of guarantees has not been as closely co-ordinated across borders as might have been desired has resulted in additional costs. To avoid additional costs arising from inconsistencies in exit strategies, close communication and coordination regarding pricing and timing issues is required, especially as a more formal framework for the public provision of insurance would still need to be developed.

Aid project exit strategies: building strong sustainable institutions

Abstract: Foreign aid project exit strategies that contribute to sustainable development have been rarely considered throughout the history of development studies and practice. The philosophical underpinnings of early development were based on economic theories. Over the years initiatives have manifested themselves by investments through international aid projects. As aid projects are donor-driven, most exit strategy planning involves closing down a project without turning it over to another organization to continue implementation. This means that aid benefits end with whatever impact the project has made, leaving ill-equipped local ministries or under-resourced NGOs to meet local development needs and fill the gap of terminated services. The project cycle—a popular development tool used by multinational and bilateral organizations alike— provides a framework to induce development, but makes no accommodation for an exit strategy that perpetuates development. This is a missed opportunity that reveals a flaw in the project cycle. This flaw can be corrected by revising the project cycle implementation stage to include building the capacity of people to perform the functions the project was designed for, as well as a local implementing entity through which they can work. Once accomplished, a sponsor can transfer project activities and resources to the local implementing entity though a phase-over process to extend development post-project for ongoing impact. The aim of this thesis is to promote a greater understanding of exit strategies and analyze an aspect of project management essential to all foreign aid projects since every project must eventually end its interventions upon completion of its goals or within prescribed financial and time constraints. What are the conditions necessary to complete a foreign aid project phase-over to a local institution successfully? How can in-country local project staff contribute to institution-building before, during, and after a phase-over? What are the appropriate ways to measure the success of a phase-over? This thesis examines the concept of exit strategy within the context of a case study of the United States Department of Agriculture’s Marketing Assistance Project (USDA-MAP) in Armenia (1995-2005) and the innovative phase-over approach it used to establish the Center for Agribusiness & Rural Development (CARD). To do this, the writings of

Post Crisis Policy: Some Reflections of a Keynesian Economist

Abstract: This paper compares the depth and length of the recent crisis with the Great Depression in the 1930s. It claims that economic policy played a crucial role in shortening and curtailing the recent crisis. We analyse which policies were applied during the recent crisis and which measures worked. We know that policies relying on large infrastructure projects inherently involve an implementation lag. These lags have been very high in the recent crisis and some expenditure planned will maybe never be spent. We therefore suggest implementing a leakage rate for government expenditure programs which represents the part of intended public expenditures not spent in the first twelve months after the program is set into action. It might be higher than the savings rate out of a tax cut. Furthermore, exit strategies should ideally cut expenditure to the same extent as the increase in government spending during the crisis had been, so that sooner or later tax rates and debt rates may return to pre crisis levels. The core of the Keynesian policy recommendation is to raise expenditure in the crisis but to achieve a balanced budget over a full cycle. If expenditure is not cut after the crisis tax and/or debt rates will increase after each downturn and the basis for any Keynesian policy in the next crisis will be eroded. This does not preclude that it might be useful in the exit phase to change the tax structure in order to lower taxes on labour, specifically for low wages, while increasing taxes on financial transactions, carbon dioxide emissions, capital gains or property. This would lower unemployment and boost demand in economies with tendencies to underconsume.

Exit Strategies of Buyout Investments: An Empirical Analysis

Abstract: Although buyout investments represent a considerable proportion of private equity volume, so far little research has been done on the exit strategies of buyout investments. This article takes a step in this direction by investigating buyouts in more detail focusing particularly on the divestment process. Since exiting enables the realization of returns and is thus the most important factor for private equity investors, it is important to understand the motivation behind and the determinants influencing this decision. The authors analyze three main exit routes for exiting buyout investments: initial public offerings (IPO), sales and write-offs, using a unique data set for U.S. and European buyout transactions. They examine the determinants influencing the choice of an exit channel by employing a multinomial logit model. The results strongly support the view that private equity investors write-off investments that turn out to be non-performing early, showing their ability to filter out bad investments. They also analyze how the internal rate of return (IRR) influences which exit route is chosen. The results show that only the most profitable ventures are taken public. The results have implications for exiting buyout investments during financial crises.

The Surge in Borrowing Needs of OECD Governments: Revised Estimates for 2009 and 2010 Outlook

Abstract: OECD governments are facing ongoing, unprecedented challenges in raising smoothly large volumes of funds at lowest possible cost, while balancing refinancing-, repricing- and interest rate risks Amidst continued uncertainty about the pace of recovery as well as the timing and sequencing of the steps of the exit strategy, gross borrowing needs of OECD governments are expected to reach almost USD 16 trillion in 2009, up from an earlier estimate of around USD 12 trillion The tentative outlook for 2010 shows a stabilising borrowing picture at around the level of USD 16 trillion A looming additional challenge is the risk that when the recovery gains traction, yields will start to rise Although there are signs that issuance conditions are becoming tougher, most OECD debt managers have been successful in financing the surge in funding needs Less successful auctions can therefore best be interpreted as “single market events” and not as unambiguous evidence of systemic market absorption problems The future could become more challenging though, given that rising issuance is occurring in tandem with increasing overall debt levels and debt service costs In response, sovereign debt managers, with the essential support of the fiscal authorities, need to implement a timely and credible medium-term exit strategy to avoid future "crowding out" and systemic issuance problems, while reducing government borrowing costs

Permanent Austerity: The Politics of the Canadian Exit Strategy from Fiscal Stimulus

Abstract: This paper fills a gap in the analysis to date in examining the political context of Canada’s fiscal stimulus rescue strategy and the subsequent turn to exit. The central question in Canada, as everywhere else, has been who will pay for the economic crisis? Canada’s federal and provincial governments have answered by signaling a sharp turn to austerity in targeting public sector workers and public services. While examples of resistance are noted, these remain far too limited to effectively challenge what is becoming a return to not just neoliberalism but a more authoritarian form at that. Keywords: austerity, public sector, deregulation, fiscal crisis.

Financial Crisis, Global Liquidity and Monetary Exit Strategies*

Abstract: We develop a roadmap of how the ECB should further reduce the volume of money (money supply) and roll back credit easing in order to prevent inflation. The exits should be step-by-step rather than one-off. Communicating about the exit strategy must be an integral part of the exit strategy. Price stability should take precedence in all decisions. Due to vagabonding global liquidity, there is a strong case for globally coordinating monetary exit strategies. Given unsurmountable practical problems of coordinating exit with asymmetric country interests, however, the ECB should go ahead – perhaps joint with some Far Eastern economies. Coordination of monetary and fiscal exit would undermine ECB independence and is also technically out of reach within the euro area.

An Exit Rule for Monetary Policy

Abstract: A simple exit rule from the extraordinary measures taken by the Federal Reserve in the past two years is proposed. The rule describes the joint path of the interest rate and the level of reserves. The rule has several attractive properties including a predictable return to traditional monetary policy which had worked well for two decades before the crisis. In addition, the paper divides the financial crisis into three periods: pre-panic, panic and post-panic. It shows that the extraordinary measures probably did not work in the prepanic or the post-panic periods, and may have helped bring on the panic, but may have some positive impact during the panic. This paper considers an exit strategy for the Federal Reserve and to use in order to unwind the extraordinary measures it has taken in the past two years. I begin with a review of the measures and an assessment of whether they have worked. I then propose an exit strategy in terms of a simple “exit rule” in which the instruments of policy are adjusted in a particular way. The exit rule describes how reserves are withdrawn in parallel as the short term interest rate is raised. The main advantage of such an exit rule is that it is predictable, and thereby reduces uncertainty and mitigates the adverse consequences that an unspecified exit strategy may have on the economy.

The Reverse Takeover: Implications for Strategy

Abstract: A reverse takeover is an acquisition of a publicly traded firm by a private business in order to sell shares and raise capital. Eighty three cases of reverse turnovers were examined. While the reverse takeover was primarily a strategy to secure capital it was also a strategy by which businesses could re-brand and a strategy to gain entry to foreign markets. For investors of failed businesses the reverse takeover is an exit strategy. INTRODUCTION Do you remember ValuJet? After a horrific crash in the Everglades which killed 105 passengers this low cost air carrier reinvented itself as the successful AirTran Airlines. The Mississippi Long Distance Discount Service (LDDS), a regional low cost telephone service, became Worldcom. Fredericks of Hollywood, the bawdy women's undergarment firm, is transforming into an innovative worldwide brand. The mechanism for each of these transformations was the reverse takeover (RTO). The reverse takeover, also referred to as "reverse mergers," is a relatively new topic of growing interest to academics. Academic research is scant because RTOs involve a relatively small number of firms; the RTO is principally viewed as a financial move of importance to venture capitalists; and, it is typically seen only as an entry strategy to secure investment capital for small firms. RTOs have been used by large, global firms found in most stock markets. The reverse takeover is also becoming an instrument for firms to cross national borders. Recently, GLG Partners, one the largest global investment firms, relocated from the U.K. to the U.S. using this entry strategy. Other foreign firms are doing the same, including firms from developing and emergent nations. This exploratory paper examines 83 RTOs from 1994 to 2008 of which 19 were initiated by U.S. firms and 74 were initiated by firms outside the U.S. The objectives are to explore a little researched area of strategy in mergers and acquisitions and to establish that reverse mergers have strategic implications beyond financial moves to access investment capital for the small firm. Mergers are a combining of two businesses into a single entity. Acquisition is the purchase of a business by another business entity. Together mergers and acquisitions (MA Collins & Montgomery, 1995). Growth acquisition strategies are driven by market, product, and technology considerations. Illustrative of market expansion, Wachovia' s 2006 acquisition of Golden West Financial Corporation expanded the East Coast bank into the western state's markets. P&G's acquisition of Gillette expanded its already highly diversified product line. In 2005 News Corporation purchased Myspace, acquiring a new technological platform for music publishing and a vehicle for building a new media blending mobile and internet reception of news from new and old sources. In these successful examples M&As are a strategy of wealth building through the creation of "synergy." Firms are targeted for acquisition because they enhance the capabilities of existing resources. The M&A objective is that a combination of two firms creates value that exceeds the value of each firm operating individually. Unlike the typical M&A the primary driver of a reverse takeover is the conversion of private assets to public ownership. The acquiring firm is a business pursuing investment. Investment capital is derived from the selling of stock over-the-counter or on a major stock exchange. To access these investment markets a private firm pursues a reverse takeover of a targeted public firm which is listed on an exchange or sells its stocks over-the-counter. In addition to access to investment, this study shows that choice of the targeted firm for acquisition also may afford strategic advantage to the acquiring firm: change in image or cross-border market entry. …

Exit Strategies from The Global Crisis

Abstract: While the form of crises may change, their essence remains the same (such as a cycle of abundant liquidity, rapid credit growth, and a low-inflation environment followed by an asset-price bubble). The current market turbulence began in mid-2000s when the US economy shifted to imbalanced both internal and external macroeconomic positions. We see two key causes of these problems – loose US monetary policy in early 2000s and US government guarantees issued on the securities by government-sponsored enterprises what was further fueled by financial innovations such as structured credit products. We have discovered both negative and positive lessons deriving from this crisis and divided the negative lessons into three groups: financial products and valuation, processes and business models, and strategic issues. Moreover, we address key risk management lessons and exit strategies derived from the current crisis and recommend policies that should help diminish the negative impact of future potential crises. Keywords—exist strategy, global crisis, risk management, corporate governance

The financial industry and challenges related to post-crises exit strategies

Abstract: Financial markets have recovered substantially but vulnerabilities remain significant. Ample liquidity may lead to new bubbles, particularly in some emerging markets, and uncertainties about government exit strategies and regulatory changes threaten a fledgling upswing. Co-ordination and communication of exit policies will be important, and exit from policy stimulus should not be precipitated at the current juncture. While financial institutions have increasingly obtained market financing and paid back state aid, the sector remains fragile; thus, such voluntary pay-backs should meet preconditions aimed at ensuring the soundness and sustainability of the concerned institutions’ balance sheets. At the same time, expectations of future writedowns and more stringent capital rules put pressure on bank lending more generally. Restarting securitisation to support lending would be important and could be fostered by government initiatives focussing on standardisation, transparency and due diligence to restore investor confidence. Regulatory reforms currently being proposed concern accounting rules, capital requirements and compensation issues. However, further reforms are required to address such systemic issues as moral hazard created by public support. Measures would include resolution mechanisms for large and systemically important banks as well as appropriately fire-walled business structures for the financial sector. Peer pressure via co-operation in international standard-setting and relevant bodies should help to keep the reform momentum, overcome political impediments to reform and maintain a level playing field.

The Global Financial Crisis: Predictions, Causes, Effects, Policies, Reforms and Prospects

Abstract: The paper examines the causes, effects, policies, and the prospects for rapid recovery and growth after the deepest world financial and economic crisis since the Great Depression. The paper then examines the regulatory and supervisory systems in the United States and Europe before the crisis, the proposed reforms of those systems, as well as reforms of the entire world financial system, and the likelihood that those reforms will succeed in preventing future financial crises.

Another unconsidered sinister effect of industry-specific crises? On the possible emergence of adverse selection phenomena on the survival of entrepreneurial ventures

Abstract: This article explores the possibility that under an intensely negative industry-specific shock, the commonly detected positive relationship between the human capital of founders and the survival prospects of start-up businesses may actually be reversed. Starting from an analysis of the issue from a theoretical perspective in order to derive the necessary and sufficient conditions for the emergence of these adverse selection phenomena in entrepreneurship, the study examines a sample of 179 Italian start-ups operating in the ICT services market created during the boom period from 1995 to early 2000. Econometric analyses provide evidence that, during an intense industry crisis (i.e., early 2000 to 2003), entrepreneurs with a substantial amount of human capital may pursue an exit strategy.

Counter-terrorist Strategies in Western Europe: A Comparative Analysis of Germany, Italy, Spain and the UK

Abstract: What should an effective counter-terrorist strategy look like? Can any lessons be drawn from past European experiences? How does terrorism end? Having answers to these three questions would be of great help to both practitioners and scholars interested in the disbandment of home-grown terrorist groups. Preventing processes of radicalization and, if at all possible, enabling the reverse process of de-radicalization has become a priority objective for EU Member States. And yet, there is a curious gap in the literature with respect to the precipitants and facilitators of terrorist disengagement. This paper provides a qualitative analysis of how four Western European states – Italy, Germany, Spain, and the UK – dealt with groups employing political violence and terrorism, and what lessons can be learned from these policies that can be applied towards future counterterrorism campaigns. The disbandment of two ethno-nationalist groups the Irish Republican Army (IRA) and the politicalmilitary branch Euskadi Ta Askatasuna (ETA-PM) and two revolutionary groups the Red Army Faction (RAF) and the Red Brigades (RB) – are examined in order to identify some of the policies that facilitate abandonment, defection, decline or defeat.

Lessons Learned from Peace Operations in Africa (Africa Security Brief, Number 3, March 2010)

Abstract: : Reducing the incidence of armed conflict remains a defining priority for Africa. The continent's recent conflicts have killed millions and displaced many more, leaving them to run the gauntlet of violence, disease, and malnutrition. These conflicts have also traumatized a generation of children and young adults, broken bonds of trust and authority structures among and across local communities, shattered education and health care systems, disrupted transportation routes and infrastructure, and done untold damage to the continent's ecology. In financial terms, the direct and indirect cost of these conflicts is well over $700 billion. The current resurgence of peace operations began in 1999 with the UN missions in Sierra Leone and the Democratic Republic of the Congo following a U.S.-led withdrawal from peacekeeping in Africa after the Black Hawk Down episode in Mogadishu in October 1993. Since then, 40 missions have been deployed to 14 African states. They were conducted principally by the UN, African Union, and European Union. This brief reviews the major strategic and operational lessons learned from these 40 peace operations with the aim of making these and future operations more effective instruments of conflict resolution. There are many mission-specific lessons that result from a review of African peacekeeping operations, but six general lessons bear highlighting: (1) An Effective Political Strategy Is a Prerequisite for Success, (2) Strategic Coordination Is Crucial, (3) Ends and Means Must Be in Synch, (4) Define and Deliver Robust Operations, (5) Focus on Effects, Not Just Numbers, and (6) Legitimacy Matters. In light of these lessons, a number of practical steps can be taken to address the challenges raised by contemporary peace operations in Africa: Clarify Mission Tasks, Prioritize Peace Operations to Support Effective Peace Processes, Design Better Entry and Exit Strategies, Deliver More and Better Resources, and Recruit More Civilians.

A Status Update on Fiscal Exit Strategies

Abstract: With a modest recovery in the global economy underway, and amid rising concerns about the sharp increase in government debt in several countries, debate has increasingly focused on the need to identify and implement fiscal exit strategies. This paper reviews the medium-term plans of 25 countries - the G20 plus six others with large adjustment needs - and finds that most of them have made reasonable progress in defining these strategies. Nevertheless, strategies fall short in some areas, including committing to long-term debt targets, spelling out adjustment measures in detail, and tackling rising health care costs.

Option Pricing Bounds and Statistical Uncertainty: Using Econometrics to Find an Exit Strategy in Derivatives Trading

Abstract: Publisher Summary The standard approach of options theory is to take as starting point the prices of a set of market-traded “primary” or “underlying” securities as well as of a money market bond. Prices of options on these primary securities are then based on self-financing trading strategies in the underlying securities. This chapter focuses on the statistical problem related to the option pricing bounds, seen from the perspective of a single actor in the market, who could be either an investor, or a regulator. The most standard approach, as practiced by many banks and many academics, is calibration. According to this approach, a suitable family of risk neutral distributions P∗ (normally corresponding to several actual P's) is picked, and then it is calibrated cross-sectionally to the current value of relevant market-traded options. The advantage of this approach is that it attempts to mark derivatives prices to market and the disadvantage is that a cross-section of today's prices do not provide much information about the behavior over time of price processes. The bounds can be used to determine reserve requirements that are consistent with an exit strategy and the bound-based reserves permit the investor to fall back on a model-free strategy in cases where the more specific model fails.

The surge in borrowing needs of OECD governments

Abstract: OECD governments are facing ongoing, unprecedented challenges in raising smoothly large volumes of funds at lowest possible cost, while balancing refinancing-, repricing- and interest rate risks Amidst continued uncertainty about the pace of recovery as well as the timing and sequencing of the steps of the exit strategy, gross borrowing needs of OECD governments are expected to reach almost USD 16 trillion in 2009, up from an earlier estimate of around USD 12 trillion The tentative outlook for 2010 shows a stabilising borrowing picture at around the level of USD 16 trillion A looming additional challenge is the risk that when the recovery gains traction, yields will start to rise Although there are signs that issuance conditions are becoming tougher, most OECD debt managers have been successful in financing the surge in funding needs Less successful auctions can therefore best be interpreted as "single market events" and not as unambiguous evidence of systemic market absorption problems The future could become more challenging though, given that rising issuance is occurring in tandem with increasing overall debt levels and debt service costs In response, sovereign debt managers, with the essential support of the fiscal authorities, need to implement a timely and credible medium-term exit strategy to avoid future "crowding out" and systemic issuance problems, while reducing government borrowing costs

Fiscal stimulus and exit strategies in a small euro area economy

Abstract: This article is focused on fiscal stimulus and exit strategies in a small euro area economy. The analysis is based on a New Keynesian general equilibrium model with non-Ricardian features introduced in Almeida, Castro and Felix (2010). We define a benchmark fiscal stimulus and, conditional on alternative exit strategies, clarify itsmacroeconomic effects. We investigate if a fiscal stimulus can be enhanced (or harmed) by particular exit strategies. The impact multipliers proved insufficient to discriminate between alternative strategies. However, since the policy impacts are not limited tothe short run, there are relevant effects over the medium run that can be used to evaluate the different strategies. It will be claimed that (i) the announcement of a promptly and timely exit strategy, contemporaneous to the announcement of the fiscal stimulus, with a consolidation period that is not prolonged indefinitively, may improve the effectiveness of the stimulus and that (ii) exit strategies based on Government consumption cuts tend to dominate over other alternatives, such as transfers cuts ortax rate increases.

European Debt Crisis and Fiscal Exit Strategies

Abstract: The 2007-2009 financial crisis was caused by financial markets' greed and instability. The crisis led public debts and deficits to rise substantially in developed countries. Financial markets and international institutions claim for a "fiscal exit strategy" through rapid reductions in public deficits and substantial falls in public debts owing to large public spending cuts (especially social expenditure). The article shows that the state of public finances was generally satisfactory before the crisis; the rise in deficits was needed for macroeconomic stabilisation purposes and does not signal higher future interest rates or inflation. 'Crisis exit strategies' should keep interest rates at low levels and government deficits, as long as they are necessary to support activity; they should question financial globalisation and macroeconomics strategies in neo-mercantilist and in liberal countries. The crisis should not be an opportunity for leading classes and European technocracies to cut social spending. Strengthening the Stability and Growth Pact would be dangerous if it deprived Member States of policy tools that were helpful in the crisis. The euro area should fight against speculation on public debts by ensuring that public debts are collectively guaranteed by the ECB and the Member States. World economic stability is not threatened by public finances imbalances, but by growing speculative financial activity.

The Politics of Paying Interest on Bank Reserves: A Criticism of Bernanke's Exit Strategy

Abstract: The Federal Reserve has recently activated its newly acquired powers to pay interest on reserves of depository institutions. The Fed maintains that its new policy increases economic efficiency and intends it to play a lead role in the exit from quantitative easing. This paper argues it is a bad policy that has a deflationary bias; is costly to taxpayers, and that cost will increase as normal conditions return; and establishes institutional lock-in that obstructs desirable changes to regulatory policy. The paper recommends repealing the Fed's power to pay interest on bank reserves. Second, the Fed should repeal regulation Q, which prohibits payment of interest on demand deposits. Third, the Fed should immediately implement an alternative system of asset-based reserve requirements (liquidity ratios) that will improve monetary control and can help exit quantitative easing at no cost to the public purse. Now is the optimal time for this change.

The Troubling Economics and Politics of Paying Interest on Bank Reserves: A Critique of the Federal Reserve's Exit Strategy

Abstract: The Federal Reserve has recently activated its newly acquired powers to pay interest on reserves of depository institutions. The Fed maintains its new policy increases economic efficiency and intends it to play a lead role in the exit from quantitative easing. This paper argues it is a bad policy that (1) has a deflationary bias; (2) is costly to taxpayers and that cost will increase as normal conditions return; and (3) establishes institutional lock-in that obstructs desirable changes to regulatory policy. The paper recommends repealing the Fed’s power to pay interest on bank reserves. Second, the Fed should repeal regulation Q that prohibits payment of interest on demand deposits. Third, the Fed should immediately implement an alternative system of asset based reserve requirements (liquidity ratios) that will improve monetary control and can help exit quantitative easing at no cost to the public purse. Now is the optimal time for this change. Lastly, the paper argues the new policy of paying interest on reserves reveals the troubling political economy governing the actions of the Federal Reserve and policy recommendations of the economics profession.