IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Log in (now much improved!) to save this paper

Exchange Rate Adjustment, Monetary Policy and Fiscal Stimulus in Japan's Escape from the Great Depression

Author Info

Listed author(s):
  • Masahiko Shibamoto

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

  • Masato Shizume

    (Institute for Monetary and Economic Studies, Bank of Japan)

Abstract

A veteran finance minister, Takahashi Korekiyo, brought an early recovery for Japan from the Great Depression of the 1930s by prescribing a combination of expansionary fiscal, exchange rate, and monetary policies. To explore the comprehensive transmission mechanism of Takahashi's macroeconomic policy package, including the expectation channel, we construct a structural vector auto-regression (S-VAR) model with three state variables (output, price, and the inflation expectations) and three policy variables (fiscal balance, exchange rate, and money stock). Our analysis reveals that the exchange rate adjustment undertaken as an independent policy tool had the strongest effect, and that changes in people's expectations played a significant role for escaping from the Great Depression. During the second half of 1931, in particular, speculation on Japan's departure from the gold standard and the inflation that was likely to follow reversed the existing expectations: instead of expecting deflation, people began to expect inflation, months ahead of the actual departure from the gold standard. As a whole, the choice of the level of the exchange rate was crucial for changing people's expectations as well as promoting exports.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://www.rieb.kobe-u.ac.jp/academic/ra/dp/English/DP2014-12.pdf
File Function: First version, 2014
Download Restriction: no

Paper provided by Research Institute for Economics & Business Administration, Kobe University in its series Discussion Paper Series with number DP2014-12.

as
in new window

Length: 37 pages
Date of creation: Mar 2014
Handle: RePEc:kob:dpaper:dp2014-12
Contact details of provider: Postal:
2-1 Rokkodai, Nada, Kobe 657-8501 JAPAN

Phone: +81-(0)78 803 7036
Fax: +81-(0)78 803 7059
Web page: http://www.rieb.kobe-u.ac.jp/index-e.html

More information through EDIRC

Keywords: Great depression; Japanese economy; Macroeconomic policy; Expectation; Vector auto-regressive model; Commodity futures;

Other versions of this item:

Find related papers by JEL classification:
  • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
  • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy
  • N15 - Economic History - - Macroeconomics and Monetary Economics; Industrial Structure; Growth; Fluctuations - - - Asia including Middle East

This paper has been announced in the following NEP Reports:

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

as
in new window


  1. Mishkin, Frederic S, 1990. " Can Futures Market Data Be Used to Understand the Behavior of Real Interest Rates?," Journal of Finance, American Finance Association, vol. 45(1), pages 245-257, March.
  2. Ben S. Bernanke & Mark Gertler & Mark Watson, 1997. "Systematic Monetary Policy and the Effects of Oil Price Shocks," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 28(1), pages 91-157.
  3. Crafts, Nicholas & Mills, Terence C., 2013. "Rearmament to the Rescue? New Estimates of the Impact of “Keynesian” Policies in 1930s' Britain," The Journal of Economic History, Cambridge University Press, vol. 73(04), pages 1077-1104, December.
  4. Christiano, Lawrence J. & Eichenbaum, Martin & Evans, Charles L., 1999. "Monetary policy shocks: What have we learned and to what end?," Handbook of Macroeconomics,in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 2, pages 65-148 Elsevier.
  5. Gauti B. Eggertsson, 2008. "Great Expectations and the End of the Depression," American Economic Review, American Economic Association, vol. 98(4), pages 1476-1516, September.
  6. Straumann, Tobias & Woitek, Ulrich, 2009. "A pioneer of a new monetary policy? Sweden's price-level targeting of the 1930s revisited," European Review of Economic History, Cambridge University Press, vol. 13(02), pages 251-282, August.
  7. Sims, Christopher A, 1980. "Macroeconomics and Reality," Econometrica, Econometric Society, vol. 48(1), pages 1-48, January.
  8. Masato Shizume, 2009. "The Japanese Economy during the Interwar Period: Instability in the Financial System and the Impact of the World Depression," Bank of Japan Review Series 09-E-2, Bank of Japan.
  9. Masato Shizume, 2011. "Sustainability of public debt: evidence from Japan before the Second World War," Economic History Review, Economic History Society, vol. 64(4), pages 1113-1143, November.
  10. Nanto, Dick K & Takagi, Shinji, 1985. "Korekiyo Takahashi and Japan's Recovery from the Great Depression," American Economic Review, American Economic Association, vol. 75(2), pages 369-374, May.
  11. 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.
  12. Johansen, Soren, 1995. "Likelihood-Based Inference in Cointegrated Vector Autoregressive Models," OUP Catalogue, Oxford University Press, number 9780198774501.
  13. Sims, Christopher A. & Zha, Tao, 2006. "Does Monetary Policy Generate Recessions?," Macroeconomic Dynamics, Cambridge University Press, vol. 10(02), pages 231-272, April.
  14. Okura, Masanori & Teranishi, Juro, 1994. "Exchange Rate and Economic Recovery of Japan in the 1930s," Hitotsubashi Journal of Economics, Hitotsubashi University, vol. 35(1), pages 1-22, June.
  15. Cecchetti, Stephen G, 1992. "Prices during the Great Depression: Was the Deflation of 1930-1932 Really Unanticipated?," American Economic Review, American Economic Association, vol. 82(1), pages 141-156, March.
  16. Romer, Christina D., 1992. "What Ended the Great Depression?," The Journal of Economic History, Cambridge University Press, vol. 52(04), pages 757-784, December.
  17. Berg, Claes & Jonung, Lars, 1999. "Pioneering price level targeting: The Swedish experience 1931-1937," Journal of Monetary Economics, Elsevier, vol. 43(3), pages 525-551, June.
  18. Eichengreen, Barry, 1996. "Golden Fetters: The Gold Standard and the Great Depression, 1919-1939," OUP Catalogue, Oxford University Press, number 9780195101133.
  19. Shizume, Masato, 2002. "Economic Developments and Monetary Policy Responses in Interwar Japan: Evaluation Based on the Taylor Rule," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 20(3), pages 77-116, October.
  20. Hsieh, Chang-Tai & Romer, Christina D., 2006. "Was the Federal Reserve Constrained by the Gold Standard During the Great Depression? Evidence from the 1932 Open Market Purchase Program," The Journal of Economic History, Cambridge University Press, vol. 66(01), pages 140-176, March.
  21. Hamilton, James D., 1987. "Monetary factors in the great depression," Journal of Monetary Economics, Elsevier, vol. 19(2), pages 145-169, March.
  22. Temin, Peter & Wigmore, Barrie A., 1990. "The end of one big deflation," Explorations in Economic History, Elsevier, vol. 27(4), pages 483-502, October.
Full references (including those not matched with items on IDEAS)

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.

as
in new window


Cited by:

  1. Razmi, Fatemeh & Azali, M. & Chin, Lee & Shah Habibullah, Muzafar, 2016. "The role of monetary transmission channels in transmitting oil price shocks to prices in ASEAN-4 countries during pre- and post-global financial crisis," Energy, Elsevier, vol. 101(C), pages 581-591.
  2. Baffigi, Alberto & Bontempi, Maria Elena & Felice, Emanuele & Golinelli, Roberto, 2015. "The changing relationship between inflation and the economic cycle in Italy: 1861–2012," Explorations in Economic History, Elsevier, vol. 56(C), pages 53-70.
  3. Barry Eichengreen, 2016. "The Great Depression in a Modern Mirror," De Economist, Springer, vol. 164(1), pages 1-17, March.
  4. repec:eco:journ1:2017-02-72 is not listed on IDEAS
  5. Fatemeh Razmi & Azali Mohamed & Lee Chin & Muzafar Shah Habibullah, 2017. "How Does Monetary Policy Affect Economic Vulnerability to Oil Price Shock as against US Economy Shock?," International Journal of Economics and Financial Issues, Econjournals, vol. 7(2), pages 544-550.
  6. SAITO, Makoto, 2017. "On large-scale money finance in the presence of black markets: the case of the Japanese economy during and after World War II," Discussion Papers 2017-01, Graduate School of Economics, Hitotsubashi University.

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Access and download statistics

When requesting a correction, please mention this item's handle: RePEc:kob:dpaper:dp2014-12. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Office of Promoting Research Collaboration, Research Institute for Economics & Business Administration, Kobe University)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.