Although they are second in the risk-bearing queue, debt-holders as well as equity-holders would be expected to shoulder, and hence price, this balance sheet risk. This could be done either by raising its cost or by restricting its quantity. Either way, debt would then serve as a restraining device on riskhungry, rent-seeking shareholders. In theory, this debtor discipline mechanism ought to work like a dream. Under the assumptions of Modigliani and Miller (1963) (MM), the pricing of risk by debt-holders ought to neutralise fully any effect of increased leverage on the value of the firm. Provided  12  Anglo-Continental Guano Works v Bell (Surveyor of Taxes) (1894) 3 TC 239. 13  Farmer (Surveyor of Taxes) v Scottish North American Trust, Ltd (1912), AC 118. 14  For example, the introduction of a separate corporate tax schedule in the UK in 1965 led for a time to the double taxation of equity. 15  These investors account for perhaps half of the US equity market and two-thirds of the UK equity market. 6  BIS central bankers’ speeches  shareholders maximise firm value, and the world behaves according to MM, debtor discipline ought to defuse completely incentives to gear-up. Figure 3 illustrates the point diagrammatically, showing payoffs to debt and equity. They are a mirror-image. The downside risk avoided by equity is assumed by debt and vice-versa for upside returns. In principle, then, combining debt and equity would lead to offsetting payoffs, neutralising risk-taking incentives.
Since the beginning of this year, lower risk premiums have accompanied a stronger krone. Developments in the GRI were also an important factor during the Russian crisis in 1998-1999. When global risk premiums and interest rates are low, investors may turn to higher-yield currencies. There is also a tendency for more peripheral currencies to attract increased attention when volatility between the major global currencies is subdued and risk premiums are low. The interest rate differential has been an important explanation for the movements in the krone exchange rate, at least since the summer of 1999. A higher interest rate differential has accompanied a stronger krone. The krone has appreciated significantly since the beginning of this year, however, and apparently somewhat more than what can be explained by the interest rate differential alone. One explanation may be that market participants react to signs of pressure in the economy by adjusting their interest rate expectations in the longer term. This has an impact on longer-term interest rates. Thus, movements in the exchange rate may be a result of changes in forward rates, as well as current interest rates. Since early January, the 12-month money market differential appears to have followed the krone exchange rate more closely than the 3-month differential. The pressure on internal resources seems to have resulted in expectations of tight monetary conditions, which contributed to the recent appreciation of the krone. The nominal appreciation of the krone has been accompanied by a significant real appreciation of Norwegian labour.