JAPANESE FINANCIAL POLICY, 1914-1940: A MONETARIST CRITIQUE (JAPAN, TIME SERIES, ECONOMETRICS)

The object of the present essay is to analyze time series data for monetary variables in the Japanese interwar period (1914-1940). Using the Granger-Sims causality test, we shall investigate the direction of causality in the relationships between the money supply, industrial production, price level, export-import ratio, and yield on stocks.; We have estimated an unconstrained vector autoregression (VAR) for empirical model building. By a triangularization of the system with variables ordered from most to least exogenous, shocks to the error terms of each equation are simulated, and the dynamic response pattern of the corresponding variable upon the full system is analyzed.; The time series evidence indicates that changes in money supply have been a non-negligible factor in generating interwar Japanese business cycles. This essay demonstrates the interrelationships between these variables in a well-defined sense to recognize that "money does matter."; In the course of the study, we emphasize the monetary aspects of the Japanese economy and try to explain what was happening (the historical record) to production and to the price level. We identify "surprises" of money supply, defined as residuals of the money equation in our VAR model. Then we use these surprises, positive and negative, to explain the movements of other variables, such as output and the price level. We expect, both from theory and from the simulation results of our VAR model, that a positive (negative) money surprise would be associated with an increase (decrease) of both output and price level contemporaneously.; We examine certain economic-historical events, beginning with "surprises" of money supply. Positive monetary surprises are linked to World War I and the postwar boom, the Kanto earthquake (1923), the banking panic of 1927, and the Takahashi expansionary policy of 1932-34. Negative monetary surprises occur in the postwar panic, the Great Depression, and the Takahashi retrenchment policy in 1934-36.; After looking at the result of interwar monetary history of Japan, we cannot avoid the impression that money has contributed to the economic growth of Japan as effectively as a real factor. The precise degree of its effectiveness is difficult to ascertain, but it is certainly greater than is recognized in the mainstream Japanese economic and financial world.