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The Real Effects of Monetary Expansions: Evidence from a Large-Scale Historical Natural Experiment

Nuno Palma

Economics Discussion Paper Series from Economics, The University of Manchester

Abstract: 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 front-loaded response of output and, to a lesser extent, inflation. There was a positive hump-shaped 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.

JEL-codes: E40 E50 N13 (search for similar items in EconPapers)
Date: 2019-02, Revised 2021-08
New Economics Papers: this item is included in nep-his
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