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The 1628 Castilian crydown: A test of competing theories of the price level

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  • José Isidro García de Paso

    ()
    (Universidad Complutense de Madrid)

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    Abstract

    On August 7, 1628 the Castilian government halved overnight the nominal stock of money through the 50% crydown of its copper currency. The paper argues that this helicopter lift of money is a nice historical experiment to put to the test the empirical relevance of competing theories of the price level. The experiment shows how the post-crydown behaviour of the price level predicted by the weak form fiscal theory (the so-called Sargent-Wallace theory) matches actual data better than both the strong form fiscal theory and the quantity theory (the so-called monetarist theory). Classification-JEL : E31, E42, E63, E65, N13.

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    Bibliographic Info

    Article provided by IEF in its journal Hacienda Pública Española/Revista de Economía Pública.

    Volume (Year): 163 (2002)
    Issue (Month): 4 (December)
    Pages: 71-92

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    Handle: RePEc:hpe:journl:y:2002:v:163:i:4:p:71-92

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    Related research

    Keywords: crydown; monetarist theory; weak form fiscal theory; strong form fiscal theory.;

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    1. Croushore, Dean, 1993. "Money in the utility function: Functional equivalence to a shopping-time model," Journal of Macroeconomics, Elsevier, vol. 15(1), pages 175-182.
    2. McCallum, Bennett T., 2001. "Indeterminacy, bubbles, and the fiscal theory of price level determination," Journal of Monetary Economics, Elsevier, vol. 47(1), pages 19-30, February.
    3. John H. Cochrane, 1998. "Long-term Debt and Optimal Policy in the Fiscal Theory of the Price Level," CRSP working papers 478, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
    4. Rao Aiyagari, S. & Gertler, Mark, 1985. "The backing of government bonds and monetarism," Journal of Monetary Economics, Elsevier, vol. 16(1), pages 19-44, July.
    5. Narayana Kocherlakota & Christopher Phelan, 1999. "Explaining the fiscal theory of the price level," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall, pages 14-23.
    6. Charles T. Carlstrom & Timothy S. Fuerst, 1999. "Money growth and inflation: does fiscal policy matter?," Economic Commentary, Federal Reserve Bank of Cleveland, issue Apr.
    7. Buiter, Willem H, 1999. "The Fallacy of the Fiscal Theory of the Price Level," CEPR Discussion Papers 2205, C.E.P.R. Discussion Papers.
    8. Leeper, Eric M., 1991. "Equilibria under 'active' and 'passive' monetary and fiscal policies," Journal of Monetary Economics, Elsevier, vol. 27(1), pages 129-147, February.
    9. Michael Woodford, 1995. "Price Level Determinacy Without Control of a Monetary Aggregate," NBER Working Papers 5204, National Bureau of Economic Research, Inc.
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