An exception that proves the rule: Japanese monetary policy under the classical gold standard, 1897–1914

The article investigates whether the Bank of Japan followed the so-called rules of the game under the classical gold standard. The article, by estimating a vector autoregressive model of monthly timeseries data for October 1897 to July 1914, finds that the Japanese central bank systematically raised the discount rate in response to a fall in the ratio of monetary gold to banknotes, a worsening of the trade balance, or a depreciation of the Japanese yen against the British pound. In contrast, the discount rate hardly responded to the Bank of England's Bank Rate, suggesting Japan's limited financial integration with Europe. The article argues that the Bank of Japan used the trade balance and the yen–sterling rate as the signals of a proximate or prospective movement in monetary gold. The findings, therefore, strongly suggest that the Bank of Japan sought to preserve gold convertibility as the primary objective of monetary policy. The Japanese central bank's rules-of-the-game-like behaviour challenges the semi-consensual view in the literature that violations of the rules were frequent and pervasive under the classical gold standard.