Working Paper: NBER ID: w2683
Authors: Takatoshi Ito; Kunio Okina; Juro Teranishi
Abstract: According to the efficient market hypothesis, news in Tokyo is responsible for the exchange rate changes during the Tokyo market hours, while the U.S. news is responsible for changes in the New York hours. The intra-daily dynamics of the $/yen exchange rate from December 1931 to November 1933 is analyzed. Japan's decision to go off gold in December 1931 depreciated yen by 30% in a month, mostly in the Tokyo market. During 1932, the yen depreciated another 30%, mainly due to Japan's aggression in China and resulting diplomatic isolation. In 1933, the yen appreciated against the dollar, mainly in the New York market, due to the U.S. decision to go off gold. However, exchange rate volatility and its sensitivity to news declined over the two year period, because of increasing capital controls. Changes in the interest rate differential was found insignificant for the changes in the exchange rate. Political regime changes, such as a decision to go off gold, most influenced the exchange rate for the period considered. There were no policy decisions by Japan to cause yen depreciation to promote export and limit import in 1931-33.
Keywords: exchange rate; gold standard; Japan; Great Depression
JEL Codes: E42; F31; N15
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Decision to go off gold on December 13, 1931 (N14) | 30% depreciation of the yen (F31) |
| Japan's military aggressions in China (H56) | further depreciation of the yen (F31) |
| US decision to abandon the gold standard in 1933 (F33) | yen appreciation against the dollar (F31) |