How Were Monetary Polices Implemented before and after the Showa Depression?
- Interpretation based on the Taylor Rule and the McCallum Rule -

Author Name HARADA Yutaka  (Daiwa Institute of Research Holdings) /SATO Ayano  (Takasaki City University of Economics)
Creation Date/NO. September 2009 09-J-025
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Did monetary policies during the interwar period aim to stabilize the economy while avoiding inflation as in today's economic environment? Also, did the monetary policies at that time aim for a return to the gold standard system?

This paper analyzes what the monetary policies during the interwar period aimed for, using the Taylor Rule and the McCallum Rule, while referring to the analysis of Shizume (2002). There are some issues with Shizume's analysis, such as difficulty in making a period-by-period analysis because the data was limited to annual data. As a result, we consider that by employing monthly data, we would be able to focus our analysis on a particular period.

Based on the Taylor Rule, the results of our analysis are in line with Shizume's findings, that monetary policies at that time functioned in the direction of amplifying inflation or deflation. Therefore, as far as real monetary polices are concerned, it is difficult to think that the return to the gold standard was adopted for the purpose of achieving old parity. It is also discovered that, to some extent, monetary policies were implemented taking into account external balances, such as the trade balance and the exchange rate.

The assessment based on the McCallum Rule yields a similar result. It is possible to assume that if the monetary policy had been implemented based on the McCallum Rule, which makes the growth rate of the monetary base dependent on a desirable growth rate of nominal GDP, changes in nominal GDP in Japan would have been more moderate. Although it would have been necessary to contract the monetary base to push down prices?if in fact the return to the gold standard had been the aim to achieve old parity?such an action was not taken.

To return to the gold standard at old parity means to bring prices back to the level before World War II. Curiously enough, it seems that this point was not understood by Japan's monetary authority during the interwar period.