Interaction of Monetary and Fiscal Policy from a Historical Perspective: Precious Metals and Venetian Government Debt

Abstract

Was monetary policy crucial for early sovereign debt sustainability? This paper analyses whether the availability of gold and silver drove Venetian government debt servicing costs in the late medieval period. We use an error correction model to describe changes in yields on perpetual bonds issued by the Venetian state. We document that the ability of the Venetian Republic to service its sovereign borrowing can be partially attributed to the supply of precious metals. We show that the substantial increase in debt servicing costs during the 15th century can be associated with an abrupt halt in the supply of gold and silver from mines in Serbia and Bosnia-primarily a consequence of the Ottoman expansion to the west. We control for other explanatory factors, such as mean reversion of nominal yield, real GDP growth and military conflicts.