I. Introduction, 590. — II. Effective tariff rates, 591. — III. Regression studies, 600. — IV. Summary, 603. — Appendix, 604.

An extensive review of the evidence related to the 2007–09 crisis reveals that it was an insolvency risk crisis, not a liquidity crisis. The appropriate post-crisis regulatory reform should therefore focus on increasing capital requirements. The Basel III liquidity requirements do not serve a useful economic purpose in dealing with the root causes of the stresses that led to the 2007–09 crisis, and unnecessarily constrain the asset transformation and liquidity creation roles of banks to the detriment of economic growth.

This paper analyzes how risk premiums altered the use of commercial paper relative to bank loans during the recent financial crisis. Consistent with the theoretical and empirical literature on how surges in risk premiums can induce plunges in under-collateralized credit or credit funded with noninsured sources, results indicate that a spike in risk premiums induced a plunge in commercial paper use during the recent crisis. This paper also finds that Federal Reserve interventions in the money market helped prevent the commercial paper market from melting down to the extent seen during the early 1930s.

Systemic risk is modeled as the endogenously chosen correlation of returns on assets held by banks. The limited liability of banks and the presence of a negative externality of one bank’s failure on the health of other banks give rise to a systemic risk-shifting incentive where all banks undertake correlated investments, thereby increasing economy-wide aggregate risk. Regulatory mechanisms such as bank closure policy and capital adequacy requirements that are commonly based only on a bank’s own risk fail to mitigate aggregate risk-shifting incentives, and can, in fact, accentuate systemic risk. Prudential regulation is shown to operate at a collective level, regulating each bank as a function of both its joint (correlated) risk with other banks as well as its individual (bank-specific) risk.

We present a model of equilibrium allocation of capital for arbitrage. If asset prices may fall low enough, it is profitable to carry liquid capital to acquire assets in such states. Set against this, keeping capital in liquid form entails costs in terms of foregone profitable investments. This trade-off generates occasional fire sales and limited arbitrage capital as robust phenomena. With learning-by-doing effects, arbitrage capital moves in to acquire assets only if fire sales are steep. However, once arbitrage capital finds it profitable to acquire assets, it requires similar returns elsewhere, inducing contagious fire-sale prices even for unrelated assets.

In a recent paper, Rati Ram (1986a) derived an equation for economic growth from two separate production functions, one for the government sector and the other for the nongovernment sector.' Three different specifications of the growth equation were estimated using data for 115 countries covering the period 1960-80. International cross-section regressions for 1960-70 and 1970-80 as well as time-series regressions for individual countries were considered. The following were the main results (Ram, 1986a, pp. 191-92): (1) the overall impact of government size on growth is positive in almost all cases; (2) the (marginal) externality effect of government size is generally positive; (3) compared with the rest of the economy, factor productivity in the government sector appears to be higher, at least during the 1960s; and (4) there is a broad harmony between the estimates obtained from crosssection and time-series data. From a policy standpoint, Ram's results, if widely accepted, have important implications, especially in regard to the economic development of the lowand middle-income developing countries. For instance, the results can be interpreted to favor a relatively large role for governments in the economies of developing countries, especially if the factor productivity in the government sector is higher than in the nongovernntent sector. The results of Ram, however, are in contrast to the findings of Daniel Landau (1986). Landau used a regression model within the framework of a pooled cross-section (65 LDCs) and time-series (1960-80) to assess the impact of a wide variety of government expenditure variables on the rate of economic The regressors included not only measures of government expenditure but also the level of per capita product, indicators of international economic conditions, human and physical capital variables, the structure of production, historical-political factors, geo-climatic factors, and others. On the impact of government on economic growth, Landau's (1986, p. 68) conclusions are: consumption expenditure' excluding military and educational expenditure... appears to have noticeably reduced economic Military and transfer expenditures do not appear to have had much impact on economic Governmental educational expenditures seem to be inefficient at generating actual education.... Government capital development expenditure appears to do nothing to accelerate economic growth. The conclusions of Ram and Landau are in sharp contrast to each other largely due to significant differences in their models and in the specification of government-size variables. Ram's model has a better theoretical foundation compared to the multiple-regression approach of Landau. On the other hand, Landau used a variety of government expenditure components as against aggregate government consumption which Ram used. Their models and results, therefore, need to be carefully evaluated in further research on the subject. This paper is an attempt in that direction and is aimed at a critical review of Ram's model and reexamination of his results. *Department of Economics and Statistics, National University of Singapore, Kent Ridge, Singapore 0511. The author is grateful to Ganesha and Sai Gayathri for inspiration, to Koh Lin Ji for computing assistance, and to Basant Kapur, Tse Yiu Kuen, Dudley Luckett, and Mukul Asher for comments and advice. Special thanks are due to the four referees of the Review for substantial comments on the earlier versions of this paper. IRam adapted the two-sector growth model of Gershon Feder (1983). Feder examined the relationship between exports and economic

This paper examines empirically the unexpected compensation to the top managers of a sample of 45 firms that voluntarily changed to capitalizing interest on long‐term construction projects during the time period 1966–1974. The cash compensation to top management increased starting the year of the accounting change compared to that of top management for a firm in the same industry of similar size. Further, a comparison of the capital expenditure per dollar of sales between the sample and a pair‐matched set of firms expensing interest in the same industry suggests that the long‐term construction project was not taken up by diverting funds from routine capital expenditures. Collectively, the results are consistent with an inference that the managers were rewarded in the short term for a set of actions with expected future benefits in the long term. The accounting change, which may have facilitated the expansion, appears embedded in such a set of actions. Résumé. Les auteurs procèdent à l'examen empirique de la rétribution inattendue que reçoivent les cadres supérieurs sur un échantillon de 45 entreprises qui sont passées volontairement à la capitalisation des intérêts dans leurs projets de construction à long terme au cours de la période s'échelonnant de 1966 à 1974. La rétribution en espèces versée aux cadres supérieurs de ces entreprises a augmenté, à partir de l'année de la modification de la méthode comptable, par rapport à la rétribution versée à la haute direction entreprises de taille similaire appartenant au même secteur d'activité. En outre, une comparaison des dépenses en immobilisations par dollar de chiffre d'affaires entre les entreprises de l'échantillon et leurs homologues du même secteur d'activité ayant opté pour l'imputation des intérêts à l'exercice a révélé que les projets de construction à long terme n'étaient pas financés à même les crédits ordinairement réservés aux dépenses en immobilisations. Dans l'ensemble, les résultats confirment le raisonnement selon lequel les gestionnaires ont été rétribués à court terme pour un ensemble d'actions dont les avantages futurs prévus se manifesteront à long terme. La modification comptable, qui peut avoir facilité l'expansion, semble inscrite dans cet ensemble d'actions.