Professors Wolff and Vermaelen add a twist by providing the original shareholders with a call option to buy back the converted debt. This serves to smooth the conversion process and avoids an incentive problem that can create so-called “death spirals.” I expect Professor Vermaelen, who will speak next, will provide more details.
If the economy moves below full employment, for example, the resulting slack results in disinflation, that is, downward pressure on inflation. When the economy moves above this threshold there is continuing upward pressure on inflation. This implies that the two objectives of price stability and full employment can conflict in the short run.