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The Curse of Moctezuma: American Silver and the Dutch Disease, 1501-1650

  • Mauricio Drelichman

    (The University of British Columbia)

This study formalizes and empirically tests the conjecture that the discovery of large silver reserves in its American colonies triggered in Spain a phenomenon known as the Dutch disease,diverting factors of production to non-traded goods industries and undermining the Spanishcomparative advantages in the Early Modern Age. I develop an open-economy model to mimic the economic conditions in Spain in the wake of the silver discoveries, which predicts anincrease in the relative price of non-traded goods following a positive wealth shock. I thenconstruct price indexes for traded and non-traded goods using Earl Hamilton's price series and new consumption baskets. Using a Markov- switching regression model, I identify a strong andpersistent increase in the relative price of non-traded goods coinciding with the silverdiscoveries, lasting for almost three decades and reversing itself only after the 1575 and 1579 crown bankruptcies. These findings largely support the Dutch Disease hypothesis.

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Paper provided by EconWPA in its series Economic History with number 0404001.

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Length: 44 pages
Date of creation: 13 Apr 2004
Date of revision:
Handle: RePEc:wpa:wuwpeh:0404001
Note: Type of Document - pdf; pages: 44
Contact details of provider: Web page: http://econwpa.repec.org

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  1. Flynn, Dennis O., 1978. "A new perspective on the spanish price revolution: The monetary approach to the balance of payments," Explorations in Economic History, Elsevier, vol. 15(4), pages 388-406, October.
  2. Motomura, Akira, 1997. "New Data on Minting, Seigniorage, and the Money Supply in Spain (Castile), 1597-1643," Explorations in Economic History, Elsevier, vol. 34(3), pages 331-367, July.
  3. Grafe, Regina, 2002. "Northern Spain between the Iberian and the Atlantic worlds: Trade and regional specialisation, 1550 1650," European Review of Economic History, Cambridge University Press, vol. 6(02), pages 269-275, August.
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  7. René Garcia & Pierre Perron, 1995. "An Analysis of the Real Interest Rate Under Regime Shifts," CIRANO Working Papers 95s-05, CIRANO.
  8. De Long, J Bradford & Shleifer, Andrei, 1993. "Princes and Merchants: European City Growth before the Industrial Revolution," Journal of Law and Economics, University of Chicago Press, vol. 36(2), pages 671-702, October.
  9. Llopis, Enrique & Jerez, Miguel & Álvaro, Adoración & Fernández, Eva, 2000. "Índices de precios de la zona noroccidental de Castilla y León, 1518–1650," Revista de Historia Económica, Cambridge University Press, vol. 18(03), pages 665-684, December.
  10. Corden, W Max & Neary, J Peter, 1982. "Booming Sector and De-Industrialisation in a Small Open Economy," Economic Journal, Royal Economic Society, vol. 92(368), pages 825-48, December.
  11. Corden, W M, 1984. "Booming Sector and Dutch Disease Economics: Survey and Consolidation," Oxford Economic Papers, Oxford University Press, vol. 36(3), pages 359-80, November.
  12. Kim, C-J., 1991. "Dynamic Linear Models with Markov-Switching," Papers 91-8, York (Canada) - Department of Economics.
  13. Edwards, Sebastian, 1984. "Coffee, money and inflation in Colombia," World Development, Elsevier, vol. 12(11-12), pages 1107-1117.
  14. Rebelo, S. & Vegh, C.A., 1995. "Real Effects of Exchange-Rate-Based Stabilization: An Analysis of Competing Theories," RCER Working Papers 405, University of Rochester - Center for Economic Research (RCER).
  15. Torvik, Ragnar, 2001. "Learning by doing and the Dutch disease," European Economic Review, Elsevier, vol. 45(2), pages 285-306, February.
  16. Hamilton, James D, 1989. "A New Approach to the Economic Analysis of Nonstationary Time Series and the Business Cycle," Econometrica, Econometric Society, vol. 57(2), pages 357-84, March.
  17. Baland, Jean-Marie & Francois, Patrick, 2000. "Rent-seeking and resource booms," Journal of Development Economics, Elsevier, vol. 61(2), pages 527-542, April.
  18. Philip R. Lane & Aaron Tornell, 1999. "The Voracity Effect," American Economic Review, American Economic Association, vol. 89(1), pages 22-46, March.
  19. Asea, Patrick K. & Lahiri, Amartya, 1999. "The precious bane," Journal of Economic Dynamics and Control, Elsevier, vol. 23(5-6), pages 823-849, April.
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  23. repec:att:wimass:9217 is not listed on IDEAS
  24. Flynn, Dennis O., 1982. "Fiscal Crisis and the Decline of Spain (Castile)," The Journal of Economic History, Cambridge University Press, vol. 42(01), pages 139-147, March.
  25. Fisher, Douglas, 1989. "The Price Revolution: A Monetary Interpretation," The Journal of Economic History, Cambridge University Press, vol. 49(04), pages 883-902, December.
  26. Torvik, Ragnar, 2002. "Natural resources, rent seeking and welfare," Journal of Development Economics, Elsevier, vol. 67(2), pages 455-470, April.
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