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The Curse of Moctezuma: American Silver and the Dutch Disease

By Mauricio Drelichman


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 Spanish comparative 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 an increase in the relative price of non-traded goods following a positive wealth shock. I then construct 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 and persistent increase in the relative price of non-traded goods coinciding with the silver discoveries, lasting for almost three decades and reversing itself only after the 1575 and 1579 crown bankruptcies. These findings largely support the Dutch Disease hypothesis. JEL Classification: N1, N

Topics: Early Modern Spain, Dutch Disease, Prices, Consumption Baskets, Switching Regression
Year: 2002
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