TY - JOUR
T1 - Exchange rate adjustment, monetary policy and fiscal stimulus in Japan's escape from the Great Depression
AU - Shibamoto, Masahiko
AU - Shizume, Masato
N1 - Funding Information:
We thank Albrecht Ritschl, Hans-Joachim Voth (Editor in Explorations in Economic History), and two anonymous referees for very useful comments and suggestions. We are also grateful to Takashi Kamihigashi, Mariko Hatase, Masanao Itoh, seminar participants at Kobe University, the Bank of Japan, and participants of the Economic History Association's 71st Annual Meeting for their helpful discussions and remarks. Shibamoto acknowledges the financial support in the form of a Grant-in-Aid from the Japanese Ministry of Education ( No. 24243044 ).
PY - 2014/7
Y1 - 2014/7
N2 - 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.
AB - 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.
KW - Commodity futures
KW - Expectation
KW - Great depression
KW - Japanese economy
KW - Macroeconomic policy
KW - Vector auto-regressive model
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U2 - 10.1016/j.eeh.2014.02.002
DO - 10.1016/j.eeh.2014.02.002
M3 - Article
AN - SCOPUS:84903760077
SN - 0014-4983
VL - 53
SP - 1
EP - 18
JO - Explorations in Economic History
JF - Explorations in Economic History
IS - 1
ER -