Martin Hellwig, born in Düsseldorf, Germany, in 1949. Ph.D. from the Massachusetts Institute of Technology, Cambridge. Director of the Max Planck Institute for Research on Collective Goods, Bonn, and Professor of Economics at Universität Bonn.
Jelle Zijlstra Fellow (1 April 2008 – 30 June 2008)
CROSS-SUBSIDIZATION AND STAND-ALONE REQUIREMENTS IN PUBLIC-SECTOR PRODUCTION
During my stay at NIAS, I began again to work on financial stability, partly in response to the current financial crisis. This crisis provides the clearest instance I know of individual behaviour and systemic interdependence creating a macroeconomic risk. By contrast, in most of the literature, systemic interdependence is seen as a consequence rather than a cause of macroeconomic risk. Further, the crisis calls into question the role of market-to-market, or fair-value accounting as a basis for the governance of banks. If the markets in which the institution is operating are subject to ‘noise’, that is, movements of prices that reflect market malfunctioning, for example, because of incomplete information, uncertainty, or even panic, valuations based on current market prices or even suspected current market prices may not provide appropriate guidance for the future. The Jelle Zijlstra Lecture provided a first, informal account of these ideas and I have also begun to develop formal models of the underlying mechanisms.