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

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  • Nuno Palma

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.

Suggested Citation

  • Nuno Palma, 2022. "The Real Effects of Monetary Expansions: Evidence from a Large-scale Historical Experiment," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 89(3), pages 1593-1627.
    • Handle: RePEc:oup:restud:v:89:y:2022:i:3:p:1593-1627.
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    File URL: http://hdl.handle.net/10.1093/restud/rdab042
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    Citations

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    Cited by:

    1. Adam Brzezinski & Nuno Palma & François R. Velde, 2024. "Understanding Money Using Historical Evidence," Annual Review of Economics, Annual Reviews, vol. 16(1), pages 571-595, August.
    2. Nuno Palma & André C. Silva, 2024. "Spending A Windfall," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 65(1), pages 283-313, February.
    3. Jesús Fernández-Villaverde & Daniel R. Sanches, 2024. "Price-Level Determination Under the Gold Standard," Working Papers 24-06, Federal Reserve Bank of Philadelphia.
    4. Fernández-Villaverde, Jesús & Sanches, Daniel, 2023. "A model of the gold standard," Journal of Economic Theory, Elsevier, vol. 214(C).
    5. Anthony Edo & Jacques Melitz, 2024. "The Controversy over European Inflation in 1500–1700: Precious Metals or Population? The English Evidence," Open Economies Review, Springer, vol. 35(3), pages 659-685, July.
    6. Patrick K. O'Brien & Nuno Palma, 2023. "Not an ordinary bank but a great engine of state: The Bank of England and the British economy, 1694–1844," Economic History Review, Economic History Society, vol. 76(1), pages 305-329, February.
    7. repec:tin:wpaper:220063 is not listed on IDEAS

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