The Real Effects of Monetary Expansions: Evidence from a Large-Scale Historical Natural Experiment
Economics Discussion Paper Series from Economics, The University of Manchester
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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Persistent link: https://EconPapers.repec.org/RePEc:man:sespap:1904
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