Knowledge that Transforms

This paper examines the problem faced by the Federal Reserve in announcing its private information about its future policies. Because it would like to manipulate expectations and pursue a time-inconsistent policy, the Fed cannot reveal its policy objectives precisely and credibly. It can, however, communicate some information about its goals through the "cheap talk" mechanism of Crawford and Sobel: making announcements that are imprecise, and only give ranges within which these goals may lie.

Recent attempts to resolve the international debt crisis have led some countries to engage in debt-equity swaps. The paper explores conditions under which such transactions are beneficial to the debtor as well as the creditors. It identifies a market failure that may prevent the emergence of mutually beneficial swaps and analyzes the effects of swaps on the investment level in the debtor country. The latter helps to evaluate the contribution of this policy to future difficulties with debt service payments.

The Slutsky equation can be simply constructed as a parallelogram the area of which is proportional to the elasticity of substitution. New properties about the curvature of the demand functions can be derived at once from this diamond, which may also be of help to explain the causes of economic growth.