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Exchange rate adjustment, monetary policy and fiscal stimulus in Japan's escape from the Great Depression

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  • Shibamoto, Masahiko
  • Shizume, Masato

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.

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  • Shibamoto, Masahiko & Shizume, Masato, 2014. "Exchange rate adjustment, monetary policy and fiscal stimulus in Japan's escape from the Great Depression," Explorations in Economic History, Elsevier, vol. 53(C), pages 1-18.
    • Handle: RePEc:eee:exehis:v:53:y:2014:i:c:p:1-18
    DOI: 10.1016/j.eeh.2014.02.002
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    4. 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.
    5. Kevin Hjortshøj O’Rourke & Sang Seok Lee & Martin Ellison, 2020. "The Ends of 30 Big Depressions," Working Papers 20200035, New York University Abu Dhabi, Department of Social Science, revised May 2020.
    6. Jason Lennard & Finn Meinecke & Solomos Solomou, 2023. "Measuring inflation expectations in interwar Britain," Economic History Review, Economic History Society, vol. 76(3), pages 844-870, August.
    7. Makoto Saito, 2021. "Central Banknotes and Black Markets: The Case of the Japanese Economy During and Immediately After World War II," Advances in Japanese Business and Economics, in: Strong Money Demand in Financing War and Peace, pages 25-56, Springer.
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    10. Masato Shizume, 2017. "A History of the Bank of Japan, 1882-2016," Working Papers 1719, Waseda University, Faculty of Political Science and Economics.
    11. 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.
    12. 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.
    13. Seyedeh Fatemeh Razmi & Leila Torki & Seyed Mohammad Javad Razmi & Ehsan Mohaghegh Dowlatabadi, 2022. "The Indirect Effects of Oil Price on Consumption through Assets," International Journal of Energy Economics and Policy, Econjournals, vol. 12(1), pages 236-242.
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    15. Jalil, Andrew J. & Rua, Gisela, 2016. "Inflation expectations and recovery in spring 1933," Explorations in Economic History, Elsevier, vol. 62(C), pages 26-50.

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    More about this item

    Keywords

    Great depression; Japanese economy; Macroeconomic policy; Expectation; Vector auto-regressive model; Commodity futures;
    All these keywords.

    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

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