Papers by Christophe Chamley
The Economic History Review, 2018
Refinancing short-term debt with a fixed monthly interest rate into funded juros under Philip II:... more Refinancing short-term debt with a fixed monthly interest rate into funded juros under Philip II: an asiento with the Maluenda brothers By CARLOSÁLVAREZ-NOGAL and CHRISTOPHE CHAMLEY * In the fragmented geographical, fiscal, and financial state inherited by Philip II of Spain, while the public debt reached an unprecedented level (50-60 per cent of GDP), the critical refinancing of unfunded asientos into funded juros was operated by merchant-bankers who signed the asientos. This process is illustrated, using abundant archival documentation, by an asiento with the Maluenda brothers in 1595, which provided the Crown with steady monthly cash payments for a year with options to sell juros for two-thirds of the credit, and a monthly rate of 1 per cent on the interim balance. Other examples are provided. F rom the premodern age on, the public debt has been divided into two parts: unfunded and funded. The first provides a buffer with a relatively short term between the shocks of expenditures and revenues for the government budget. The second is in long-term tradeable financial instruments and must be serviced by stable, earmarked taxes. Refinancing the short-term floating debt that accumulates during a war into long-term funded debt with lower interest has presented a critical challenge for the finances of all states. England solved this problem during its 'financial revolution' in the eighteenth century. 1 Under Philip II of Spain who, in the sixteenth century, ruled over a fragmented empire without a centralized capital market or a developed fiscal administration, the public debt reached the unprecedented level of 50 to 60 per cent of GDP. 2 More than 90 per cent of that debt was in funded juros (either perpetuals or life annuities, essentially redeemable at par). 3 The short-term debt (about one to four years) 4 was in asientos (contracts) with merchant bankers. Most of these came from Genoa but they often resided in Castile, and they had an intimate knowledge of
SSRN Electronic Journal, 2017
The French Wars (1793-1815) exerted unprecedented pressures on Britain's fiscal and monetary poli... more The French Wars (1793-1815) exerted unprecedented pressures on Britain's fiscal and monetary policy settings. Policy makers had to constantly adjust the policy mix as events unfolded. This meant implementing monetary and fiscal policy innovations, such as the suspension of the gold standard and the instauration of Britain's first income tax. These adjustments signalled the government's commitment to undertake the necessary to win the war, without jeopardizing fiscal sustainability. Drawing on new hand-collected data, we also show that the Bank of England played an essential role in two successive phases of the war. The Bank granted ample liquidity to the domestic payment system, by discounting large amounts of private bills. It also financed the decisive phase of the wars by purchasing large amounts of public debt. The successful winding down of the balance sheet and the resumption of the gold standard influenced the Bank's policies and shaped the political and financial landscape for the century to come. 3
Revista de Historia Económica / Journal of Iberian and Latin American Economic History, 2016
The marginal efficiency costs of different taxes is analyzed in three models with endogenous grow... more The marginal efficiency costs of different taxes is analyzed in three models with endogenous growth, and the values are compared with those found in standard models. The models analyze how taxes affect (i) the trade-off between human capital accumulation and leisure, (ii) the intertemporal trade-off in consumption, and (iii) the trade-offs in a two-sector model. In general, the efficiency cost in models with endogenous growth may be greater or lower than in models with exogenous growth. When the value of the efficiency cost is very large, it is found to be very sensitive to the specification of the model, and it is reduced dramatically when government expenditures are a production input. In the two-sector model, the only tax which has a very high efficiency cost is the tax on time spent for human capital accumulation, and it may not be empirically important. It is verified that a positive impact of a tax reform on the long-term growth rate is not indicative of welfare improvement.
Theoretical Economics, Dec 13, 2007
In a financial market where agents trade for prices in the short-term and where news can increase... more In a financial market where agents trade for prices in the short-term and where news can increase the uncertainty of the public belief, there are strategic complementarities in the acquisition of private information and a continuum of equilibrium strategies if the cost of information is sufficient small. Imperfect observation of the past prices reduces the continuum of Nash-equilibrium to a unique one which may be a Strongly Rational-Expectations Equilibrium. In that equilibrium, because of the strategic complementarity, there are two sharply different regimes for the evolution of the price, the volume of trade and the information acquisition which is either nil or at its maximum.
Cote d'Ivoire's increase in debt in the 1980s (from 30 percent of GDP to 100 percent) did little ... more Cote d'Ivoire's increase in debt in the 1980s (from 30 percent of GDP to 100 percent) did little for new investment, because the investment-GDP ratio barely compensated for inflation. The country's fiscal stance hurt the real exchange rate and international competitiveness. The Polic), Res"arch, and External Affairs Complcx distnbutes PRIE Working Papers to disseminate thO findings of work Di progress and to encourage the exchange of idcas among Blink st4ff and a'l othein intcrested in devclolment issues These papers cantT thc niamzes ol the authors, relcct only their views, and should he used and cited accordngy 'IThe findings, inmrprctations, and conchl,lon, arc tic authors' own. ehcy should not hc aitrihuted to the A'orld Bank, its Board iof Directors, its iman-gmcnt, or any of its mcmher countncs
As recent events attest, modern economies may have trouble enforcing Say's Law. An economy wi... more As recent events attest, modern economies may have trouble enforcing Say's Law. An economy with decentralized markets and trades between goods and a liquid asset, money, has two equilibria. In full-employment, output is determined by supply. But a higher demand for liquidity is self-fulfilling and precipitates the economy to an equilib-rium where output is determined by demand: the increase of the private uncertainty about the ability to sell goods generates the higher demand for liquidity. That state may be a trap: a reverse shift from pessimism to optimism may not be sufficient, without policy intervention, to restore full-employment. were very helpful.
A simple model of financial market with rational learning and without friction is presented in wh... more A simple model of financial market with rational learning and without friction is presented in which the value of private information increases with the mass of informed individuals, contrary to the property presented by Grossman and Stiglitz (1980). The key assumption is the possibility of independent discrete shocks on the fundamental value and on an exogenous demand.
American Economic Review, 2003
This paper presents a model of rational Bayesian agents with speculative attacks in a regime of e... more This paper presents a model of rational Bayesian agents with speculative attacks in a regime of exchange rate which is pegged within a band. Speculators learn from the observation of the exchange rate within the band whether their mass is sufficiently large for a successful attack. Multiple periods are necessary for the existence of speculative attacks. Various defense policies are analyzed. A trading policy by the central bank may defend the peg if it is unobserved and diminishes the market's information for the coordination of speculators.
Because of the informality of this series and to make the publication available with the least po... more Because of the informality of this series and to make the publication available with the least possible delay, the manuscript has not been edited as fully as would be the case with a more formal document, and the World Bank accepts no responsibility for errors. References link Part VIII. Perspectives on Tax Reform And Agenda for Future Research 16. Roundtable Discussions link Amaresh Bagcbi link Richard Musgrave link Charles E.McLure,Jr. link Nicbolas Stern link
The Review of Economic Studies, 2013
The mechanism by which aggregate supply creates the income that generates its matching demand (ca... more The mechanism by which aggregate supply creates the income that generates its matching demand (called Say's Law), may not work in a general equilibrium with decentralized markets and savings in bonds or money. Full employment is an equilibrium, but convergence to that state is slow. A self-fulfilling precautionary motive to accumulate bonds (with a zero aggregate supply) can set the economy on an equilibrium path with a fast convergence towards a steady state with unemployment that may be an absorbing state from which no equilibrium path emerges to restore full employment.
American Economic Review, 2012
There are many alleged culprits for the bank runs of 2008 and their devastating economic fallout.... more There are many alleged culprits for the bank runs of 2008 and their devastating economic fallout. But proprietary information and leverage top our list. Claims of proprietary information forced financial markets to operate on trust, while providing the perfect breeding ground for fraud. And leverage permitted creditors to run at the first whiff of fraud, leveling one financial giant after another. Limited Purpose Banking (LPB), presented here, is a financial reform that sharply curtails proprietary information and eliminates leverage and, thus, the possibility of financial collapse. LPB's adoption is supported by our simple model showing how fraud can destroy finance.
Journal of Money, Credit and Banking, 2011
Reallocation is an equilibrium phenomenon. Economic restructuring is ceaseless and is a critical ... more Reallocation is an equilibrium phenomenon. Economic restructuring is ceaseless and is a critical aspect of economic activity. This has been recognized at least since Schumpeter who emphasized the need for constant restructuring and coined the term creative destruction (see, e.g., Schumpeter (1942)). Reallocation is not frictionless however, and the impediments to reallocation and their macroeconomic consequences are studied in a recent and growing literature. Particularly pertinent is the interaction between financing and reallocation, and its effect on business cycle fluctuations and growth. Chamley and Rochon (2010, this issue of the JMCB) consider a model with random matching of banks with loanable funds and entrepreneurs with financing needs. Banks' incentives to roll over loans instead of liquidating them and freeing up loanable funds for redeployment depend on the ease with which loanable funds can be reallocated to other entrepreneurs. The main result is that there are two steady state equilibria, one with a lot of reallocation and the other with limited reallocation. In a
IEEE Signal Processing Magazine, 2013
Signal processing is very much tied to extracting information and making inferences from physical... more Signal processing is very much tied to extracting information and making inferences from physical phenomena. The traditional modalities, that our field is given credit for advancing, are speech, images, video, communication signals, remote sensing and a number of biomedical sensors that digital and array processing methods enable. More recently, Brain Machine Interfaces (BMI) have also become a research focus of signal processing researchers. We continue to fill the gap between human signals and computers, leading to today's highly computerized social landscape. Controlling the medium through which people inform each other and communicate, opens the door to learn what they value and influence their beliefs, doing in an automated fashion what humans have been competing to do throughout history, gaining prestige to gain power. For the architects of these networks it is perhaps time to more closely consider their applications. How do individuals influence each other decisions? Why leaders emerge in societies or fall out of favor? How do societies steer their beliefs and values? In the last century mathematical models developed in social sciences and economic theory attempted to capture macroscopic trends emerging from individuals communications and their decision making process. There are excellent review articles and books that summarize the theories used to infer and interpret social swarming phenomena, and some have more closely inspired the models we review [1]-[3]. As we will discuss in Section II, the aim of these theories is to define a conceptual framework to examine them mathematically, to gain insights on what may happen under plausible simplifying assumptions. Often, these mathematical models are separated from the physical modalities of these interactions because the The authors research was supported by NSF CCF-1011811.
The Economic History Review, 2013
By CARLOS ÁLVAREZ-NOGAL and CHRISTOPHE CHAMLEY* Under Philip II, Castile was the first country wi... more By CARLOS ÁLVAREZ-NOGAL and CHRISTOPHE CHAMLEY* Under Philip II, Castile was the first country with a large nationwide domestic public debt. A new view of that fiscal system is presented that is potentially relevant for other fiscal systems in Europe before 1800. The credibility of the debt, mostly in perpetual redeemable annuities, was enhanced by decentralized funding through taxes administered by cities making up the Realm in the Cortes.The accumulation of short-term debt depended on refinancing through long-term debt. Financial crises in the short-term debt occurred when the service of the long-term debt reached the revenues of its servicing taxes. They were not caused by liquidity crises and were resolved after protracted negotiations in the Cortes by tax increases and interest rate reductions. K ing Philip II, as head of the first modern superpower , managed a budget on a scale that had not been seen since the height of the Roman Empire. 2 No state before had faced such extraordinary fluctuations and imbalances, both in revenue and expenditure. Large military expenses were required by the politics of Europe and the revolution in military technology. The variability in both revenue and expenses, coupled with a large foreign component, was met by large public borrowings up to modern levels, a historical innovation that, in later centuries, would be followed by the Netherlands, France, and England. Like eighteenthcentury England, Castile (about 80 per cent of modern-day Spain) established its military supremacy through its superior ability to mobilize large resources through borrowing. The debt-to-GDP ratio exceeded 50 per cent, according to some estimates, and the ratio between interest service and tax revenues at the end of the century was about 50 per cent, as it would be in England or France two centuries later. 3 These impressive numbers were achieved without a central administration to collect tax
Econometrica, 1986
This paper analyzes the optimal tax on capital income in general equilibrium models of the second... more This paper analyzes the optimal tax on capital income in general equilibrium models of the second best. Agents have infinite lives and utility functions which are extensions from the Koopmans form. The population is heterogeneous. The important property of the models is the equality between the social and the private discount rates in the long run. I find that the optimal tax rate is zero in the long run. For a special case of additively separable utility functions, I then determine the tax rates along the dynamic path and conditions that are sufficient for the local stability of the steady state. ' Discussions with Paul Champsaur, Dale Jorgenson, Laurence Kotlikoff, and participants of seminars at C.O.R.E. and at Yale have been stimulating. Comments by the editor and by an anonymous referee were particularly helpful. Partial financial support from a C.O.R.E. fellowship is gratefully acknowledged. Donna Zerwitz provided expert editorial assistance. * Pestieau [13] has shown that under some conditions, the standard Ramsey tax formulae (Diamond and Mirrlees [a]), apply in the steady state of a general equilibrium model with overlapping generations. For a discussion of some of these conditions, see Atkinson and Sandmo [3]. Summers [14] has remarked that in life-cycle models with additively separable utility functions and constant pure rate of time preference, the long-run interest elasticity of supply for savings increases with the number of periods. This would imply that the interest tax has a large welfare cost, and that its rate in the second best is relatively low. His analysis is restricted to a comparison between steady states. The framework of this paper does not make these restrictive assumptions about the utility function, and the second best policy optimizes over the entire dynamic path.
Coordination of Expectations and the Informational Role of Policy!
Page 1. Coordination of Expectations and the Informational Role of Policy! Yang K. Lu)and Ernesto... more Page 1. Coordination of Expectations and the Informational Role of Policy! Yang K. Lu)and Ernesto Pasten* June, 2009 Abstract An informational role of policy arises in economies where large fluctuations are triggered by self ...
Annals of Finance, 2009
In a simple model of a frictionless financial market with rational agents, the value of private i... more In a simple model of a frictionless financial market with rational agents, the value of private information increases when large discrete shocks independently affect the fundamental value of the asset and the exogenous trading. The complementarity in information gathering generates multiple equilibria.
The large public debt was created in 16th century Castile. A new view of its fiscal system is pre... more The large public debt was created in 16th century Castile. A new view of its fiscal system is presented. The main part of the debt was in perpetual redeemable annuities and its credibility was enhanced by decentralized funding through taxes administered by cities that ...
England financed its war of the Austrian succession (1743-48) mainly by issuing 3% bonds and 4% c... more England financed its war of the Austrian succession (1743-48) mainly by issuing 3% bonds and 4% callable bonds which were indeed redeemed by Pelham in 1749 through an interest reduction. Implicit policy rules and constraints made the 4% bond a derivative asset of a 3% perpetual. The price data fit with a model of pricing of this derivative. The estimated model shows that the redemption terms were well anticipated, but government bond prices recovered after the war much sooner than expected. Callable bonds enabled the government to exploit the excess of pessimism during the war and lower its borrowing cost.
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Papers by Christophe Chamley