The real effects of monetary expansions: evidence from a large-scale historical experiment

The discovery of massive deposits of precious metals in America during the early modern period caused an exogenous monetary injection to Europe’s money supply. I use this episode to identify the causal effects of money. Using a panel of six European countries, I find that monetary expansions had a material impact on real economic activity. The magnitudes are substantial and persist for a long time: an exogenous 10% increase in the production of precious metals in America measured relative to the European stock leads to a frontloaded response of output and, to a lesser extent, inflation. There was a positive humpshaped response of real GDP, with a cumulative increase up to 0.9% six to nine years later. The evidence suggests that this is because prices responded to monetary injections with considerable lags.

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