Mardi | 2010-12-07
B103

Oscar GELDERBLOM – Joost JONKER – Cyrille PIATECKI – Christian RIETSCH

The debate over the institutions that link economic growth to public finance tends todisregard the need for savings to finance growing public debt. We analyze Holland’s 17thcentury public debt and find that its structure, size, and issuing rates were determined byinvestors’ preferences, themselves driven by economic growth, wealth accumulation, andchanging private investment opportunities. Savings generated by economic growthenabled the government to build up a huge debt largely with short-term bills. At the sametime issuing rates dropped because savings outstripped private investment alternatives. InHolland’s case, and probably in others as well, credible commitment and efficient fiscalinstitutions were necessary, but not sufficient to create liquid secondary markets and lowcosts of capital.