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

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.