Review of Economic Studies Vol. 89 No. 3 2022
The Real Effects of Monetary Expansions: Evidence from a Large-scale Historical Experiment
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.
- DOI
- 10.1093/restud/rdab042
- Volume
- 89
- Issue
- 3
- Pages
- 1593-1627
- Language
- en
- Sources
- bibtex:phds-export.bib openalex crossref