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Capital Market Integration with Multiple Convergence Clubs: The Case of Prewar Japan

Author

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  • Tetsuji Okazaki

    (Faculty of Economics, The University of Tokyo)

  • Koji Sakai

    (Division of Economics, Kyoto Sangyo University)

Abstract

This paper examines capital market integration in prewar Japan, using a methodology that allows for multiple equilibria in convergence. Specifically, we apply the method of log t regression and the club convergence test proposed by Phillips and Sul (2007) to examine the convergence of prefectural loan rates and detect the convergence clubs that followed heterogeneous transition paths. Whereas prefectural loan rates were converging towards two equilibria from 1888–1900, all the prefectural loan rates converged towards a unique equilibrium from 1901–1926. From 1927, however, the prefectural loan rates diverged again, and four different convergence clubs emerged. Restrictive regulation imposed by the Bank Law of 1928 reduced competition in local markets, increased barriers to interregional capital mobility, and, thereby, reversed capital market integration.

Suggested Citation

  • Tetsuji Okazaki & Koji Sakai, 2020. "Capital Market Integration with Multiple Convergence Clubs: The Case of Prewar Japan," CARF F-Series CARF-F-475, Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo.
    • Handle: RePEc:cfi:fseres:cf475
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    References listed on IDEAS

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