Imes Discussion Paper Series Institute for Monetary and Economic Studies Bank of Japan

This paper provides an overview of economic developments and the conduct of monetary policy in interwar Japan, while considering the relationships of these fluctuations and policies to changes in the monetary regime. To this end, monetary policies under the respective monetary regimes are discussed by using the Taylor Rule, which has recently been widely applied to evaluations of monetary policy. The analyses in this paper reveal that Japan’s monetary policy from the gold standard era through the interwar period generally worked in a procyclical manner in relation to inflation rates, though influenced by the choice of monetary regimes. Domestic economic stability was sacrificed in the conduct of monetary policy to attain exchange rate targets under the gold standard system before the First World War (WWI) and under the managed floating system in the 1920s. Although more effective monetary policy designed to stabilize the domestic economy might have been enabled after the departure from the gold standard, such policies were not actually carried out.