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The Price Revolution in the 16th Century: Empirical Results from a Structural Vectorautoregression Model

The Price Revolution in the 16th Century: Empirical Results from a Structural Vectorautoregression Model

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Published by babstar999
Peter Kugler and Peter Bernholz
WWZ /University of Basel

Abstract: This paper provides empirical evidence in favor of the hypothesis that

the secular price increase in the 16th century is mainly caused by money supply

developments as the discovery of new mines in Latin America. First we review

price developments for several European countries over the 16th century in the

light of this hypothesis. Second the application of a SVAR model to annual time

series of price indexes for Old Castile and Leon and New Castile over the 16th

century indicates that not only the trend but also the short to medium variability of

price movements in 16th century Spain are dominated by permanent money

supply shocks.
Peter Kugler and Peter Bernholz
WWZ /University of Basel

Abstract: This paper provides empirical evidence in favor of the hypothesis that

the secular price increase in the 16th century is mainly caused by money supply

developments as the discovery of new mines in Latin America. First we review

price developments for several European countries over the 16th century in the

light of this hypothesis. Second the application of a SVAR model to annual time

series of price indexes for Old Castile and Leon and New Castile over the 16th

century indicates that not only the trend but also the short to medium variability of

price movements in 16th century Spain are dominated by permanent money

supply shocks.

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Categories:Types, Research, History
Published by: babstar999 on Jan 11, 2012
Copyright:Attribution Non-commercial

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03/10/2014

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The Price Revolution in the 16thCentury: Empirical Results from aStructural VectorautoregressionModel
Peter Kugler and Peter BernholzWWZ /University of Basel
Abstract: This paper provides empirical evidence in favor of the hypothesis thatthe secular price increase in the 16
th
century is mainly caused by money supplydevelopments as the discovery of new mines in Latin America. First we reviewprice developments for several European countries over the 16
th
century in thelight of this hypothesis. Second the application of a SVAR model to annual timeseries of price indexes for Old Castile and Leon and New Castile over the 16
th
 century indicates that not only the trend but also the short to medium variability ofprice movements in 16
th
century Spain are dominated by permanent moneysupply shocks.JEL: E31, E58, E65Key words: Price revolution, money demand, money supply
January 2007
 
 
1. Introduction
During the 16
th
century we observe a steady price increase in all Europeancountries: at the end of the century prices were three to four times higher thanat the beginning of the century. This amounts to an annual inflation rate inthe range of 1% to 1.5% which looks small given the inflationary experienceof the 20
th
century. In deed this inflation rate is close to the target inflation rateof price stability oriented central banks of today. However, given the fact thatthe monetary regime of the 16
th
century was a metallic standard mainly basedon silver this secular inflation is remarkable as such a monetary regime hasan intrinsic price level stabilization property: rising commodity prices lead to afall in the purchasing power of the monetary metal and correspondingly lessincentive to mine it and more incentive to use it for non monetary purposes.This endogenous adjustment of the money supply leads to long run stability ofthe price level even if permanent shifts in money demand occur over time.Therefore long run inflation can only be explained either by debasement ofcoins or by shifts in the supply of the monetary metal: a permanent ceterisparibus increase in the productivity of mining the monetary metal leads to afall of its relative price which is accomplished by rising prices for the othercommodities. This process only comes to an end if the purchasing power ofthe monetary metal is equal to its production costs.Therefore the obvious candidate for the great price revolution from theeconomic viewpoint is the discovery of new silver and gold deposits and theproductivity increase in the silver mining industry in the 16
th
century. Thisprocess started in Central Europe around the beginning of the century.According to an estimation by North (1994, p. 74) central European silveroutput doubled between 1470 and 1520, and increased further in the 1520swith the new mine of Joachimsthal. In the 1530s, however, it declined sharply.Between 1492 and 1550 a substantial amount of gold, looted in the NewWorld was brought to Europe by the Spanish and Portuguese. From the1540s a rising supply of silver was shipped to Europe from the newly
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discovered mines in Mexico and Peru, where the silver mountain of Potosiwas discovered in 1545. The output of the Potosi mine rose strongly in the1560s after mercury deposits had been discovered in the Andes. Mercurywas necessary to process the silver. According to Hamilton (1934) the totalimports of treasure (gold and silver) from the New World during the 16
th
 century amounted to 206.6 million pesos, of which only about 15 % wereimported before 1555 (Figure 1.1). A peso had a silver content of 18.95 g.Thus the total amount corresponded to about 3915 metric tons of silver. Butas Kindleberger mentions: “It is generally recognized that Hamilton'sestimates understate imports for the early years of the seventeenth century,because he counted only those imports recorded by the official Casa deContratacion in Seville. Dutch and English East India ships directly in Cadiz,downstream from Seville. In addition, considerable amounts of silver wentfrom Peru to Acapulco in Mexico between 1573 and 1815, and from thence tothe Philippines ...” (1998, p.3). The same should also hold for the second halfof the 16
th
century, though to a lesser degree.
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  1   5   0  3  -   0   5  1   5  1   6  -   2   0  1   5  3  1  -  3   5  1   5  4   6  -   5   0  1   5   6  1  -   6   5  1   5   7   6  -   8   0  1   5   9  1  -   9   5
05000000100000001500000020000000250000003000000035000000
Figure 1.1Total Imports of Treasure from theNew World to Spain in Pesos, 16th Century
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