“The Real Effects of Monetary Expansions: Evidence from a Large-Scale Historical Experiment”, 2021-09-25 ():
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 6 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% 6 to 9 years later.
The evidence suggests that this is because prices responded to monetary injections with considerable lags.
[Keywords: identification in macroeconomics, early modern monetary injections, liquidity effects, wealth effects, monetary non-neutrality]