Can We Prove a Bank Guilty of Creating Systemic Risk? A Minority Report

Because increasing a bank's capital requirement to improve the stability of the financial system imposes costs upon the bank, a regulator should ideally be able to prove beyond a reasonable doubt that banks classified as systemically risky really do create systemic risk before subjecting them to this capital punishment. Evaluating the performance of two leading systemic risk models, we show that estimation error alone prevents the reliable identification of the most systemically risky banks. We conclude that it will be a considerable challenge to develop a riskometer that is sound and reliable enough to provide an adequate foundation for macroprudential policy.     

Financing Innovation and Growth: Cash Flow, External Equity, and the 1990s R&D Boom

The financing of R&D provides a potentially important channel to link finance and economic growth, but there is no direct evidence that financial effects are large enough to impact aggregate R&D. U.S. firms finance R&D from volatile sources: cash flow and stock issues. We estimate dynamic R&D models for high-tech firms and find significant effects of cash flow and external equity for young, but not mature, firms. The financial coefficients for young firms are large enough that finance supply shifts can explain most of the dramatic 1990s R&D boom, which implies a significant connection between finance, innovation, and growth.     

FARMERS’ WILLINGNESS TO COOPERATE IN ECOSYSTEM SERVICE PROVISION: DOES TRUST MATTER?

Ecosystem service provision in agriculture may require cooperation between farmers. Trust fosters cooperation in many economic and social interactions and is important to the success of traditional agricultural cooperatives. Little is known about how trust affects farmers’ willingness to cooperate to provide an ecosystem service, what types of trust are most important, and under what conditions trust may matter. In this study, we present results of a survey of Missouri crop farmers exploring the role trust plays in farmers’ stated willingness to cooperate to control pests. We find that most farmers say they are willing to cooperate, and most farmers are willing to trust others. However, we find little evidence that trust positively influences farmers’ willingness to cooperate to control pests. Instead, we find that trust may only matter under certain conditions, such as when participants’ farms are dissimilar, and that other determinants, such as the perceived benefit of cooperation and environmental concern, are more important than trust to farmers who are contemplating cooperation to control pests.     

TIME UNDER AUTOCRATIC RULE AND ECONOMIC GROWTH

We investigate how the length of time a country's regime was autocratic between 1920 and 2000 is correlated with economic growth and per capita income. We find that the longer a country was within an autocracy, the lower is the country's economic performance, even after controlling for other factors. We also find the length of time a country is not autocratic is positively related to growth and income. We claim this evidence is consistent with the thesis that one reason why some countries have had difficulty adjusting to life after autocracy is that the human and social capital necessary to make markets “work” eroded under autocratic regimes and take time to develop afterward. (JEL O17, O43, P0)     

An Economic Analysis of Interest Rate Swaps

Interest rate swaps, a financial innovation in recent years, are based upon the principle of comparative advantage. An interest rate swap is a useful tool for active liability management and for hedging against interest rate risk. The purpose of this paper is to provide a simple economic analysis of interest rate swaps. Alternative uses of and the appropriate valuation procedure for interest rate swaps are described.