Could Money in the Showa Depression Era Be Controlled by Base Money?(in Japanese)

The Great Depression in Japan, also known as the Showa Depression, was not as serious as the Great Depressions in other countries. There have been many arguments to back up this claim: Harada, Sato, and Nakazawa [2007] concluded that Japan's monetary policy alleviated the Depression. This analysis uses M2 as a monetary policy instrument. Monetary authority can use M2 as a target, but cannot directly control M2. That is, how to control M2 becomes an important issue. We tried to explain the behavior of the money multiplier by using a partial adjustment model, but the results do not fit the theory of explaining the money multiplier. However, it is confirmed that the money multiplier was a stable variable in the era. We then analyzed whether M2 could grow by increasing base money, and concluded that an increase of base money caused the increase of M2, and that this relation was stable. According to the variance decomposition in this paper, 35 percent of fluctuation of M2 was explained by that of base money. It is suggested that the increase of M2 increased price and industrial production. The above results show that the increase of base money saved the Japanese economy from the Showa Depression. Reference Harada, Yutaka, Ayano Sato, Masahiko Nakazawa, Shouwa Kyoukou Ki no Zaisei Seisaku to Kinyu Seisaku wa dochiraga Juyou dattaka (Which Was More Important During the Showa Depression: Fiscal Policy or Monetary Policy?), ESRI Discussion Paper Series No.176, March 2007, Economic and Social Research Institute, Cabinet Office