Spending a Windfall: American Precious Metals and Euro-Asian Trade,

Transcription

1 Spending a Windfall: American Precious Metals and Euro-Asian Trade, Nuno Palma (European University Institute and University of Groningen) André C. Silva (Nova SBE) American Economic Association Congress, San Francisco CA, 2016

2 Facts I The current account surplus of China today is not an historical novelty

3 Facts I The current account surplus of China today is not an historical novelty I From 1500 to 1800, silver comprised 90% of China s imports from Europe and European colonies (Pomeranz 2001, p.273)

4 Facts I The current account surplus of China today is not an historical novelty I From 1500 to 1800, silver comprised 90% of China s imports from Europe and European colonies (Pomeranz 2001, p.273) I China had scarcity of precious metals and di culties in setting a monetary standard

5 What we do I "[T]he rise of European trade with the east should be seen primarily as a consequence not of trade routes to the east but of the discovery of America [because of the discovery of precious metals]" (Harley 2004, p.179)

6 What we do I "[T]he rise of European trade with the east should be seen primarily as a consequence not of trade routes to the east but of the discovery of America [because of the discovery of precious metals]" (Harley 2004, p.179) I We test this hypothesis using a structural model which can simulate the counterfactual

7 What we do I "[T]he rise of European trade with the east should be seen primarily as a consequence not of trade routes to the east but of the discovery of America [because of the discovery of precious metals]" (Harley 2004, p.179) I We test this hypothesis using a structural model which can simulate the counterfactual I Using a dynamic general equlilibrium model, we construct a quantiative counterfactual in which a new route to Asia is found, without the discovery of precious metals

8 Llamas carrying precious metals in America

9 Motivation

10 Why is this important? I Precious metals contributed to the rise of Western Europe (Pomeranz 2001)

11 Why is this important? I I Precious metals contributed to the rise of Western Europe (Pomeranz 2001) Causal importance of new exotic goods to estimulate an industrious revolution (de Vries 2008, Voth 2008, Hersh and Voth 2009)

12 Why is this important? I I I Precious metals contributed to the rise of Western Europe (Pomeranz 2001) Causal importance of new exotic goods to estimulate an industrious revolution (de Vries 2008, Voth 2008, Hersh and Voth 2009) Importance of Asian luxuries in promoting Europe s industrial development (Berg 2004, 2007)

13 Why is this important? I I I Precious metals contributed to the rise of Western Europe (Pomeranz 2001) Causal importance of new exotic goods to estimulate an industrious revolution (de Vries 2008, Voth 2008, Hersh and Voth 2009) Importance of Asian luxuries in promoting Europe s industrial development (Berg 2004, 2007) I Porcelain, tea, silk (the iphones of the time)

14 Why is this important?

15 Why is this important? Source: Broadberry et al (2015)

16 Preview of results I Even with the new sea routes to Asia, without American precious metals early modern Euro-Asian trade would have been negligible

17 Preview of results I Even with the new sea routes to Asia, without American precious metals early modern Euro-Asian trade would have been negligible I Simulated dynamic general equilibrium model with calibrated transaction costs suggests that under the monetary injection European purchases of Asian goods are up to 4.5 times those of the unshocked baseline scenario

18 Preview of results I Even with the new sea routes to Asia, without American precious metals early modern Euro-Asian trade would have been negligible I Simulated dynamic general equilibrium model with calibrated transaction costs suggests that under the monetary injection European purchases of Asian goods are up to 4.5 times those of the unshocked baseline scenario I Most of the observed increase in Euro-Asian trade is explained by the monetary injections, as opposed to a fall in transportation costs

19 American treasure: arrivals to Europe Fine silver, tones Gold, tones Initial stock, Europe (1492) Imports to Europe Total imports Sources: Costa, Rocha and Sousa (2010), Hamilton (1970), Morineau (1985), Braudel and Spooner (1967), Velde and Weber (2000)

20 Model I Dynamic general equilibrium model

21 Model I Dynamic general equilibrium model I European representative agent

22 Model I Dynamic general equilibrium model I European representative agent I Asian representative agent

23 Model I Dynamic general equilibrium model I European representative agent I Asian representative agent I The only di erence is that only the European economy receives a monetary windfall

24 Model I Dynamic general equilibrium model I European representative agent I Asian representative agent I The only di erence is that only the European economy receives a monetary windfall I 2 agents, 2 consumption goods, and money

25 Model I European representative agent problem max cee,c ea,m et t=0 β t u (c eet, c eat, m e,t ) s.t. p 1t c eet + p 2t c eat (1 + b) + m e,t p 1t A e + m e,t 1 + d t.

26 Model I European representative agent problem max cee,c ea,m et t=0 β t u (c eet, c eat, m e,t ) s.t. p 1t c eet + p 2t c eat (1 + b) + m e,t p 1t A e + m e,t 1 + d t. I c eet : consumption in Europe of European goods

27 Model I European representative agent problem max cee,c ea,m et t=0 β t u (c eet, c eat, m e,t ) s.t. p 1t c eet + p 2t c eat (1 + b) + m e,t p 1t A e + m e,t 1 + d t. I c eet : consumption in Europe of European goods I c eat : consumption in Europe of Asian goods

28 Model I European representative agent problem max cee,c ea,m et t=0 β t u (c eet, c eat, m e,t ) s.t. p 1t c eet + p 2t c eat (1 + b) + m e,t p 1t A e + m e,t 1 + d t. I c eet : consumption in Europe of European goods I c eat : consumption in Europe of Asian goods I m e,t : precious metals

29 Model I European representative agent problem max cee,c ea,m et t=0 β t u (c eet, c eat, m e,t ) s.t. p 1t c eet + p 2t c eat (1 + b) + m e,t p 1t A e + m e,t 1 + d t. I c eet : consumption in Europe of European goods I c eat : consumption in Europe of Asian goods I m e,t : precious metals I b: iceberg cost

30 Model I European representative agent problem max cee,c ea,m et t=0 β t u (c eet, c eat, m e,t ) s.t. p 1t c eet + p 2t c eat (1 + b) + m e,t p 1t A e + m e,t 1 + d t. I c eet : consumption in Europe of European goods I c eat : consumption in Europe of Asian goods I m e,t : precious metals I b: iceberg cost I A e : production in Europe

31 Model I European representative agent problem max cee,c ea,m et t=0 β t u (c eet, c eat, m e,t ) s.t. p 1t c eet + p 2t c eat (1 + b) + m e,t p 1t A e + m e,t 1 + d t. I c eet : consumption in Europe of European goods I c eat : consumption in Europe of Asian goods I m e,t : precious metals I b: iceberg cost I A e : production in Europe I d t : discoveries of precious metals

32 Closing the system I Analogous problem for the Asian representative agent

33 Closing the system I Analogous problem for the Asian representative agent I Market clearing conditions L e c eet + L a c aet (1 + b) = L e A e L e c eat (1 + b) + L a c aat = L a A a L e m e,t + L a m a,t = L e m e,t 1 + L e d t + L a m a,t 1

34 Closing the system I Analogous problem for the Asian representative agent I Market clearing conditions L e c eet + L a c aet (1 + b) = L e A e L e c eat (1 + b) + L a c aat = L a A a L e m e,t + L a m a,t = L e m e,t 1 + L e d t + L a m a,t 1 I L e : population in Europe

35 Closing the system I Analogous problem for the Asian representative agent I Market clearing conditions L e c eet + L a c aet (1 + b) = L e A e L e c eat (1 + b) + L a c aat = L a A a L e m e,t + L a m a,t = L e m e,t 1 + L e d t + L a m a,t 1 I L e : population in Europe I L a : population in Asia

36 Functional forms u (c et, m et ) = where c et ac η et + (1 a) m η et 1 σ ω γ 1 γ 1 γ ceet + (1 ω) γ 1 c 1 σ η 1 γ 1 γ eat γ γ 1

37 Equilibrium p 1t A e + m e,t 1 + d t p 1t c eet p 2t c eat (1 + b) m e,t = 0 c eet c eat = ω 1 ω p2t (1 + b) p 1t γ (1 a) m η 1 et = ac η 1 et c et 1 c eet p 1t ac β η et+1 +(1 ac η et +(1 a)mη et+1 a)m η et 1 σ η η ac η 1 c et+1 1 et+1 c eet+1 p 1t+1

38 Calibration Parameter Value Calibrated structural parameters Discount factor β 0.98 Elasticity of Substitution Parameter σ 2 Elasticity of Substitution Parameter η Elasticity of Substitution γ 2 Home bias ω 0.86 Consumption weight a e 0.75 Population, Europe (millions) L E 74 Population, Asia (millions) L A 360 European Income A e Asian Income A a Estimated structural parameters Euro-Asian trade transct. cost (bf. the new rout) b i 10 Euro-Asian trade transct. cost (aft. the Discoveries) b f 8

39 Method 1. Find initial steady state

40 Method 1. Find initial steady state I Use data on per capita precious metals in Europe

41 Method 1. Find initial steady state I Use data on per capita precious metals in Europe 2. Find nal steady state

42 Method 1. Find initial steady state I Use data on per capita precious metals in Europe 2. Find nal steady state I Use data on accumulated discoveries of precious metals

43 Method 1. Find initial steady state I Use data on per capita precious metals in Europe 2. Find nal steady state I Use data on accumulated discoveries of precious metals 3. Calculate the transition with data on the discoveries from 1531 to 1790

44 Method 1. Find initial steady state I Use data on per capita precious metals in Europe 2. Find nal steady state I Use data on accumulated discoveries of precious metals 3. Calculate the transition with data on the discoveries from 1531 to 1790 I Decrease iceberg cost to simulate the discovery of the new route to Asia

45 Data 10 Discoveries

46 0 Results Europe Asia Prices of Consumption Goods

47 Results 70 Net Exports of Precious Metals from Europe (% of Discoveries) Figure: "China was the main and ultimate destination directly or through intermediaries of Spanish American silver since the sixteenth Net Exports of European Goods to Asia (Relative to Initial Steady State) century" 1 (Irigoin 2009) 0.9

48 Results 5 Consumption per Capita (Relative to Initial Steady State) c ee c ea c ae c aa

49 Results Net Exports of European Goods to Asia (Relative to Initial Steady State)

50 Results c ee c ea c ae c aa 4.5 European Net Imports of Asian Goods (Relative to Initial Steady State) b I = 10, b F = 8, 2 e =!0:02, 2 a =!0:02,. e = 2:00,. a = 2:00

51 Results 5 Consumption per Capita (Relative to Initial Steady State) New Route, with Discoveries of Precious Metals New Route, without Discoveries of Precious Metals c ea c ae c ae c ea

52 Results c ea c ae c ae c ea 4.5 European Net Imports of Asian Goods (Relative to Initial Steady State) New Route, with Discoveries of Precious Metals New Route, without Discoveries of Precious Metals b I = 10, b F = 8, 2 e =!0:02, 2 a =!0:02,. e = 2:00,. a = 2:00

53 Our simulation matches the empirical facts I Intercontinental trade is only a small fraction of total output

54 Our simulation matches the empirical facts I Intercontinental trade is only a small fraction of total output I Imports of Asian goods in Europe are higher than imports of European goods in Asia

55 Our simulation matches the empirical facts I Intercontinental trade is only a small fraction of total output I Imports of Asian goods in Europe are higher than imports of European goods in Asia I European agents have higher equilibrium consumption levels, but not much higher

56 Our simulation matches the empirical facts I Intercontinental trade is only a small fraction of total output I Imports of Asian goods in Europe are higher than imports of European goods in Asia I European agents have higher equilibrium consumption levels, but not much higher I Equilibrium nominal price is higher in Europe

57 Our simulation matches the empirical facts I Intercontinental trade is only a small fraction of total output I Imports of Asian goods in Europe are higher than imports of European goods in Asia I European agents have higher equilibrium consumption levels, but not much higher I Equilibrium nominal price is higher in Europe I We hence explain the "standards of living debate" puzzle of early modern economic history which asks why were both nominal wages and prices higher in Europe (Allen 2005)

58 We provide an economic explanation I Historians traditional explanations have relied on cultural factors:

59 We provide an economic explanation I Historians traditional explanations have relied on cultural factors: I "For some inexplicable reason Orientals have always had a penchant for hoarding treasure" (Hamilton 1929, p. 347)

60 We provide an economic explanation I Historians traditional explanations have relied on cultural factors: I I "For some inexplicable reason Orientals have always had a penchant for hoarding treasure" (Hamilton 1929, p. 347) "Spanish plunder was mainly in the form of precious metals. These were very important in nancing European trade with Asians, who were not very interested in buying European products" Maddison (2007, p.312)

61 We provide an economic explanation I Historians traditional explanations have relied on cultural factors: I I "For some inexplicable reason Orientals have always had a penchant for hoarding treasure" (Hamilton 1929, p. 347) "Spanish plunder was mainly in the form of precious metals. These were very important in nancing European trade with Asians, who were not very interested in buying European products" Maddison (2007, p.312) I Instead, our explanation emerges as a consequence of rational agents taking decisions in a dynamic, GE context

62 Conclusions I American precious metals were the major driving impulse behind early modern Euro-Asian trade

63 Conclusions I American precious metals were the major driving impulse behind early modern Euro-Asian trade I Contribution to the great divergence debate

64 Conclusions I American precious metals were the major driving impulse behind early modern Euro-Asian trade I Contribution to the great divergence debate I Contribution to the early modern standards of living debate

65 Conclusions I American precious metals were the major driving impulse behind early modern Euro-Asian trade I Contribution to the great divergence debate I Contribution to the early modern standards of living debate I Contribution to the European industrious revolution literature