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A Reassessment of Japan's Monetary Policy during the Great Depression: The Constraints and Remedies

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  • Masato Shizume

    (Research Institute for Economics & Business Administration (RIEB), Kobe University, Japan)

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    Abstract

    Temin [1989] and Eichengreen [1992] argue that monetary policy played a key role in each country's economic performance during the Great Depression, and that some European policymakers hesitated to pursue an expansionary monetary policy even after departing from gold. Why did these policymakers not pursue the opportunities they were able to pursue to the fullest extent? This study explores this issue by looking at the case of Japan, focusing on the constraints it faced and the remedies available to it as a small, open economy. This study explores the relationship between interest rates in Japan and in the major international financial centers, using a new series of representative long-term interest rates and narratives. This study reveals that Japan imposed a restrictive monetary policy on itself even after departing from the gold standard. Japan did so because it needed to maintain its ties both with its trading partners and with the international financial markets.

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    File URL: http://www.rieb.kobe-u.ac.jp/academic/ra/dp/English/dp208.pdf
    File Function: First version, 2007
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    Bibliographic Info

    Paper provided by Research Institute for Economics & Business Administration, Kobe University in its series Discussion Paper Series with number 208.

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    Length: 34 pages
    Date of creation: Oct 2007
    Date of revision:
    Handle: RePEc:kob:dpaper:208

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    1. Obstfeld, Maurice & Shambaugh, Jay C. & Taylor, Alan M., 2004. "Monetary Sovereignty, Exchange Rates, and Capital Controls: The Trilemma in the Interwar Period," Center for International and Development Economics Research, Working Paper Series qt73c4n1tr, Center for International and Development Economics Research, Institute for Business and Economic Research, UC Berkeley.
    2. Eichengreen, Barry & Sachs, Jeffrey, 1985. "Exchange Rates and Economic Recovery in the 1930s," The Journal of Economic History, Cambridge University Press, vol. 45(04), pages 925-946, December.
    3. Gregory, Allan W. & Hansen, Bruce E., 1996. "Residual-based tests for cointegration in models with regime shifts," Journal of Econometrics, Elsevier, vol. 70(1), pages 99-126, January.
    4. Phillips, Peter C B & Ouliaris, S, 1990. "Asymptotic Properties of Residual Based Tests for Cointegration," Econometrica, Econometric Society, vol. 58(1), pages 165-93, January.
    5. Maurice Obstfeld & Alan M. Taylor, 1999. "The Great Depression as a Watershed: International Capital Mobility over the Long Run," NBER Working Papers 5960, National Bureau of Economic Research, Inc.
    6. M. Hashem Pesaran & Yongcheol Shin & Richard J. Smith, 2001. "Bounds testing approaches to the analysis of level relationships," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 16(3), pages 289-326.
    7. Cha, Myung Soo, 2003. "Did Takahashi Korekiyo Rescue Japan from the Great Depression?," The Journal of Economic History, Cambridge University Press, vol. 63(01), pages 127-144, March.
    8. James H. Stock & Mark W. Watson, 1991. "A simple estimator of cointegrating vectors in higher order integrated systems," Working Paper Series, Macroeconomic Issues 91-3, Federal Reserve Bank of Chicago.
    9. Peter Temin, 1991. "Lessons from the Great Depression," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262700441, January.
    10. MacKinnon, James G, 1996. "Numerical Distribution Functions for Unit Root and Cointegration Tests," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 11(6), pages 601-18, Nov.-Dec..
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