The Evolution and Importance of Public Credit

2011 ◽  
Author(s):  
David Stasavage
Keyword(s):  
Interest Rates ◽  
Early Modern Europe ◽  
Access To Credit ◽  
Public Credit ◽  
The Difference ◽  
City States ◽  
The Cost ◽  
Territorial States ◽  
New Evidence

This chapter examines why access to credit was important for European states and provides extensive new evidence on the evolution of public credit across five centuries, from 1250 to 1750. The ability to borrow was critical in medieval and early modern Europe because it allowed states to participate in wars, either defensive or offensive. In order to better understand this fact, the chapter analyzes the movement that took place from compulsory to paid service for soldiers, along with opportunities to finance wars through current taxation. It also explains when states first borrowed long-term and measures the cost of borrowing, focusing on interest rates based on nominal rates at issue when these are available, and based on the fiscal proxy when they are not. The chapter highlights the difference between city-states and territorial states, with the former enjoying an apparent financial advantage that allowed them to begin borrowing earlier and to obtain access to lower-cost finance.

Assessing the City-State Advantage

2011 ◽  
Author(s):  
David Stasavage
Keyword(s):  
Economic Development ◽  
Political Representation ◽  
Theoretic Model ◽  
Access To Credit ◽  
Public Credit ◽  
Game Theoretic ◽  
The Difference ◽  
City States ◽  
City State ◽  
Territorial States

This chapter examines whether the difference in the activities of representative assemblies in city-states and territorial states had implications for the evolution of public credit. It first develops a basic game theoretic model that demonstrates how both political representation and public credit might emerge as an equilibrium outcome dependent on an underlying cost for representatives of monitoring public finances. It then uses the model to conduct empirical tests in order to identify what factors were correlated with the initial creation of a long-term public debt. Three hypotheses are tested: that access to credit depended on commercial and economic development; that access to credit depended on the presence of representative institutions; and that access to credit depended on the differing underlying conditions in city-states and territorial states. The results show that greater commercial and economic development favored access to public credit.

States of Credit

2011 ◽  
Author(s):  
David Stasavage
Keyword(s):  
Early Modern ◽  
Political Institutions ◽  
Political Representation ◽  
Active Form ◽  
Early Modern Europe ◽  
Access To Credit ◽  
Long Run ◽  
Public Credit ◽  
City States ◽  
Territorial States

This book provides the first comprehensive look at the joint development of representative assemblies and public borrowing in Europe during the medieval and early modern eras. It argues that unique advances in political representation allowed certain European states to gain early and advantageous access to credit, but the emergence of an active form of political representation itself depended on two underlying factors: compact geography and a strong mercantile presence. The book shows that active representative assemblies were more likely to be sustained in geographically small polities. These assemblies, dominated by mercantile groups that lent to governments, were in turn more likely to preserve access to credit. Given these conditions, smaller European city-states, such as Genoa and Cologne, had an advantage over larger territorial states, including France and Castile, because mercantile elites structured political institutions in order to effectively monitor public credit. While creditor oversight of public funds became an asset for city-states in need of finance, the book suggests that the long-run implications were more ambiguous. City-states with the best access to credit often had the most closed and oligarchic systems of representation, hindering their ability to accept new economic innovations. This eventually transformed certain city-states from economic dynamos into rentier republics. Exploring the links between representation and debt in medieval and early modern Europe, the book contributes to broad debates about state formation and Europe's economic rise.

Introduction

2011 ◽  
Author(s):  
David Stasavage
Keyword(s):  
Economic Development ◽  
State Formation ◽  
Political Representation ◽  
Distinctive Features ◽  
Systematic Data ◽  
Access To Credit ◽  
Level Of Activity ◽  
Public Credit ◽  
City States ◽  
Territorial States

This book examines two distinctive features of European state formation: the invention of the concept of political representation and the development of a system of public credit. Using systematic data on public credit and political representation for thirty-one European states over the period 1250–1750, the book asks whether the presence of an intensive form of representation facilitated access to credit for the former, allowing them to survive and their economies to prosper. It also explores how this joint emergence of credit and representation affected broader trends involving war, state formation, and economic development. The book argues that the presence of an intensive form of representation characterized by an assembly that could monitor and modify expenditures played a key role in facilitating access to credit by European states. The book also discusses the prerogatives and level of activity of representative assemblies in territorial states as compared to city-states.

scholarly journals Guaranteed Annuity Options

2003 ◽  
Vol 33 (02) ◽  
pp. 125-152 ◽  
Author(s):  
Phelim Boyle ◽  
Mary Hardy
Keyword(s):  
Interest Rates ◽  
Insurance Companies ◽  
Retirement Savings ◽  
Fixed Rate ◽  
Life Annuity ◽  
Stock Market Performance ◽  
New Business ◽  
The Difference ◽  
The Cost

Under a guaranteed annuity option, an insurer guarantees to convert a policyholder's accumulated funds to a life annuity at a fixed rate when the policy matures. If the annuity rates provided under the guarantee are more beneficial to the policyholder than the prevailing rates in the market the insurer has to make up the difference. Such guarantees are common in many US tax sheltered insurance products. These guarantees were popular in UK retirement savings contracts issued in the 1970's and 1980's when long-term interest rates were high. At that time, the options were very far out of the money and insurance companies apparently assumed that interest rates would remain high and thus that the guarantees would never become active. In the 1990's, as long-term interest rates began to fall, the value of these guarantees rose. Because of the way the guarantee was written, two other factors influenced the cost of these guarantees. First, strong stock market performance meant that the amounts to which the guarantee applied increased significantly. Second, the mortality assumption implicit in the guarantee did not anticipate the improvement in mortality which actually occurred. The emerging liabilities under these guarantees threatened the solvency of some companies and led to the closure of Equitable Life (UK) to new business. In this paper we explore the pricing and risk management of these guarantees.

scholarly journals Guaranteed Annuity Options

2003 ◽  
Vol 33 (2) ◽  
pp. 125-152 ◽  
Author(s):  
Phelim Boyle ◽  
Mary Hardy
Keyword(s):  
Interest Rates ◽  
Insurance Companies ◽  
Retirement Savings ◽  
Fixed Rate ◽  
Life Annuity ◽  
Stock Market Performance ◽  
New Business ◽  
The Difference ◽  
The Cost

Under a guaranteed annuity option, an insurer guarantees to convert a policyholder's accumulated funds to a life annuity at a fixed rate when the policy matures. If the annuity rates provided under the guarantee are more beneficial to the policyholder than the prevailing rates in the market the insurer has to make up the difference. Such guarantees are common in many US tax sheltered insurance products. These guarantees were popular in UK retirement savings contracts issued in the 1970's and 1980's when long-term interest rates were high. At that time, the options were very far out of the money and insurance companies apparently assumed that interest rates would remain high and thus that the guarantees would never become active. In the 1990's, as long-term interest rates began to fall, the value of these guarantees rose. Because of the way the guarantee was written, two other factors influenced the cost of these guarantees. First, strong stock market performance meant that the amounts to which the guarantee applied increased significantly. Second, the mortality assumption implicit in the guarantee did not anticipate the improvement in mortality which actually occurred.The emerging liabilities under these guarantees threatened the solvency of some companies and led to the closure of Equitable Life (UK) to new business. In this paper we explore the pricing and risk management of these guarantees.

scholarly journals Why Do Some Firms Spend So Much on Medical Care? Accounting for Variation

2000 ◽  
Vol 3 (1) ◽  
Author(s):  
Matthew Eichner ◽  
Mark McClellan ◽  
David A. Wise
Keyword(s):  
Health Care ◽  
Health Care Cost ◽  
Health Care Expenditures ◽  
Cost Of Treatment ◽  
Consistent Method ◽  
The Difference ◽  
The Cost ◽  
Cost Differences ◽  
Average Expenditure

We are engaged in a long-term project to analyze the determinants of health care cost differences across firms. An important first step is to summarize the nature of expenditure differences across plans. The goal of this article is to develop methods for identifying and quantifying those factors that account for the wide differences in health care expenditures observed across plans.We consider eight plans that vary in average expenditure for individuals filing claims, from a low of $1,645 to a high of $2,484. We present a statistically consistent method for decomposing the cost differences across plans into component parts based on demographic characteristics of plan participants, the mix of diagnoses for which participants are treated, and the cost of treatment for particular diagnoses. The goal is to quantify the contribution of each of these components to the difference between average cost and the cost in a given firm. The demographic mix of plan enrollees accounts for wide differnces in cost ($649). Perhaps the most noticeable feature of the results is that, after adjusting for demographic mix, the difference in expenditures accounted for by the treatment costs given diagnosis ($807) is almost as wide as the unadjusted range in expenditures ($838). Differences in cost due to the different illnesses that are treated, after adjusting for demographic mix, also accounts for large differences in cost ($626). These components of cost do not move together; for example, demographic mix may decrease expenditure under a particular plan while the diagnosis mix may increase costs.Our hope is that understanding the reasons for cost differences across plans will direct more focused attention to controlling costs. Indeed, this work is intended as an important first step toward that goal.

Three Territorial State Experiences

2011 ◽  
Author(s):  
David Stasavage
Keyword(s):  
Seventeenth Century ◽  
Political Representation ◽  
Dutch Republic ◽  
Access To Credit ◽  
Territorial State ◽  
Public Credit ◽  
History Of ◽  
City State ◽  
Territorial States ◽  
Strong Control

This chapter examines public credit and political representation in three European territorial states: France, Castile, and Holland. It tackles the following question: If having a representative assembly with strong control over finance had major advantages, then why could territorial states not emulate the institutions present in their city-state neighbors? The chapter first considers the early history of the rentes sur l'Hôtel de Ville and how it set the stage for the French monarchy's frequent difficulty in later obtaining access to credit. It then discusses absolutism in Castile and Castilian public credit in the seventeenth century, along with representative assemblies in the Dutch Republic. The experience of France, Castile, and the Dutch Republic shows that most territorial states faced obstacles in establishing an intensive form of political representation, and thus in gaining access to credit.

Effects of Fiscal Policy on Credit Markets

2020 ◽  
Vol 110 ◽  
pp. 119-124 ◽  
Author(s):  
Alan J. Auerbach ◽  
Yuriy Gorodnichenko ◽  
Daniel Murphy
Keyword(s):  
Financial Markets ◽  
Interest Rates ◽  
Credit Markets ◽  
Local Economy ◽  
Government Contracts ◽  
Fiscal Stimulus ◽  
Access To Credit ◽  
Consumer Loans ◽  
Us Federal Government ◽  
The Cost

Credit markets typically freeze in recessions: access to credit declines, and the cost of credit increases. A conventional policy response is to rely on monetary tools to saturate financial markets with liquidity. Given limited space for monetary policy in the current economic conditions, we study how fiscal stimulus can influence local credit markets. Using rich geographical variation in US federal government contracts, we document that, in a local economy, interest rates on consumer loans decrease in response to an expansionary government spending shock.

New Evidence on Expected Long Term Real Interest Rates

1988 ◽  
Vol 1 (2) ◽  
pp. 19-23 ◽  
Author(s):  
Thomas Havrilesky
Keyword(s):  
Interest Rates ◽  
Real Interest Rates ◽  
New Evidence

Abstract No abstract available.

scholarly journals Financing Cost Optimization in Construction Sector: A Review

2020 ◽  
Vol 26 (10) ◽  
pp. 94-108
Author(s):  
Saja Hadi Aldhamad ◽  
Sedqi Esmaeel Rezouki
Keyword(s):  
Interest Rates ◽  
Optimization Model ◽  
Cost Optimization ◽  
Financing Cost ◽  
Funding Sources ◽  
Credit Line ◽  
Planning Models ◽  
Financing Costs ◽  
The Cost

The main aim of this research is to introduce financing cost optimization and different financing alternatives. There are many studies about financing cost optimization. All previous studies considering the cost of financing have many shortcomings, some considered only one source of financing as a credit line without taking into account different financing alternatives. Having only one funding alternative powers, restricts contractors and leads to a very specific financing model. Although it is beneficial for the contractor to use a long-term loan to minimize interest charges and prevent a substantial withdrawal from his credit line, none of the existing financial-based planning models have considered long-term loans in their models or included a schedule of borrowed money and a repayment schedule with interest rates. The aim of this study is not only to eliminate the shortcomings of previous studies but also to incorporate a financing optimization model for various funding alternatives available to contractors in terms of funding sources and forms, cash provision times, interest rates and repayment options. This work proposes a financing optimization model, not only to remove the limitations but also to find optimal financing costs while offering the financing schedule without increasing the project duration and adjusting the starting times of the activities.

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