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“In economics, as in any empirical science, the advancement of knowledge essentially falls in one of two categories. At times, some noteworthy phenomenon is observed empirically, and we seek plausible models which display the same phenomenon. If our catalogue of models does not contain one that displays the observed phenomenon, then we try to construct models that do. On the other hand, sometimes we find that a particular model in our catalogue displays an unusual or remarkable phenomenon. In this case, we go looking for empirical evidence of that the phenomenon actually occurs in real life.

Systemic risk falls in neither category. We do not have any serious models that can be said to display systemic risk. Thus systemic risk is not a theoretical phenomenon in search of empirical confirmation. Furthermore, we do not have any convincing empirical evidence of phenomenon that can be readily identified as systemic risk. About the only evidence we have for systemic risk is that many central bank officials speak of it when discussing their lender of last resort function or the risk containment measures they impose on private settlement arrangements.”

Jeffrey M. Lacker, Federal Reserve Bank of Richmond, Comments presented at the Second Joint Central Bank Research Conference on Risk Measurement and Systemic Risk at the Bank of Japan, Tokyo, November 16-17, 1998. [Has been edited for brevity and inner consistency.]

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