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Convergence of inflation with a common cycle: estimating and modelling Spanish historical inflation from the 16th to the 18th centuries

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Abstract

The aim of this paper is twofold. First, to obtain inflation rates for the four regions of Spain analysed for the period 1501–1800 by modelling Hamilton’s (American treasure and the price revolution in Spain, 1934; War and prices in Spain, 1947) price index series by means of an unobserved component model with a common cyclical factor. And second, to prove their long-term convergence process. Therefore, convergence concerns both the cyclical variation of inflation rates common to the four regions, and trend inflation. A complete convergence of the trend inflation occurred once the monetary reforms of Charles II of Spain were introduced in order to redress the previous monetary instability known as inflation of the vellón. The predominance of the vellón in small change and the concentration of the influx of silver when inflation was comparatively lower (second half of the sixteenth century and the seventeenth century) complicate to reach simple conclusions on the monetary origin of inflation exclusively based on precious metals, but, on the contrary, suggest a monetary origin based on copper coin and fiscal distortions. So, monetary stability proved to be a necessary condition for inflation convergence and the fulfilment of the purchasing power parity condition along the eighteen century.

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Notes

  1. The vellón (billon) is a based copper coin generally used as small change. Before 1602, it also contained a proportion of silver. The bibliography on the vellón and the monetary reforms affecting its face value and composition is very abundant. For introductory purposes, see, for example, Velde and Weber (2000).

  2. Another possibility, which is followed here, is to estimate the noise variance ratio \(nvr={\sigma _{\varepsilon }^{2}}/{\sigma _{e}^{2}}\), see Young (1994). The importance of this parameter in obtaining the trend will be discussed in the Sect. 5.

  3. The consumer goods considered and their temporal availability are detailed in Hamilton (1934, 1947) appendixes. In addition to the number of goods, to increase the number of available prices to calculate the average price of a good causes its variance to reduce, that is, the sample average is more precise.

  4. The opposite \(nvr^{-1}\) has been estimated due to its numerical magnitude.

  5. The average annual rate of inflation between 1501 and 1800 was 0.5 % in Andalusia, 0.4 % in New and Old Castile and 0.3 % in Valencia. In the first half of the sixteenth century, the most inflationary period, average annual inflation rates stood at 1.4, 1.2, 1.0, and 0.9 % respectively. We agree with the remarks made by Martín Aceña (1992) when he pointed out that it is fair to speak of a “price revolution” not because of the amount prices increased, but because the trend lasted for around 150 years.

  6. The error term of the common cyclical variation has a standard variance of 1, so that differences in cyclical amplitude are seen in factor loadings.

  7. This dating rule is commonly used in business cycle analysis, albeit applied to quarterly GDP observations.

  8. A reference to inter-regional price levels in the same currency during a same base year is needed in order to ascertain whether purchasing power parity in absolute terms had been achieved. This reference could be obtained from the detailed information supplied by Hamilton but exceeds the objectives of this paper.

  9. The relationship between different \(nvr^{-1}\) parameter values and the period of oscillations included in the trend are obtained from the spectral characteristic of the filter. See, for example Harvey and Trimbur (2008).

  10. It can also be observed the limited magnitude of the dispersion of these long-term rates, which do not exceed one percentage point. This fact again allows us to show the differences between a metallic cash-based monetary system and a fiduciary one.

  11. Inflationary measures were adopted in the years 1532, 1596, 1597, 1602, 1603, 1636, 1641, 1642, 1643, 1652, 1654, 1658 and 1659; and deflationary measures in the years 1566, 1628, 1651, 1660, 1664, 1680 and 1684.

  12. A Castilian unit of account whose metallic counterpart was abandoned before the period here analysed.

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Acknowledgments

The authors would like to thank the Instituto de Investigaciones Económicas y Sociales “Francisco de Vitoria” for the grant received for this project from the 2nd and 3rd call for proposals for research projects. The authors would also like to thank Carlos Álvarez Nogal, Félix Fernando Muñoz Pérez, Pedro Schwartz Girón and Pedro Tedde de Lorca for their comments on this work and their help in improving this paper.

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  1. Instituto de Investigaciones Económicas y Sociales “Francisco de Vitoria”, Universidad Francisco de Vitoria, Carretera M-515, Pozuelo-Majadahonda, Km. 1,800, 28223 , Pozuelo de Alarcón, Madrid, Spain

    José Luis Cendejas Bueno & Cecilia Font de Villanueva

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  1. José Luis Cendejas Bueno
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  2. Cecilia Font de Villanueva
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Correspondence to José Luis Cendejas Bueno.

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Cendejas Bueno, J.L., Font de Villanueva, C. Convergence of inflation with a common cycle: estimating and modelling Spanish historical inflation from the 16th to the 18th centuries. Empir Econ 48, 1643–1665 (2015). https://doi.org/10.1007/s00181-014-0840-8

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