Macroeconomic Policy with Financial Market Stability: A Case Study of the Early 19th Century in Japan

This paper provides a historical case study in pre-modern era which shows that financial market stability is a necessary condition for an effective macroeconomic policy. We explore the implications on the rice market interventions as a tool of the macroeconomic policy in Japan's early 19th century. Some anecdotal evidences support the view that, in the wake of the policy failure in 1761, the Shogunate recognized the importance of the financial market stability as well as the rice price stability in implementing the market interventions. By using high-frequency event study approach, we find that, while the 'actual' interventions before October 1806 did not help the rice market to boost up, the Shogunate was successful to improve the rice exchange market by the 'oral' interventions after October 1806. The Shogunate implemented the macroeconomic policy maintaining the deep communication with the financial market and achieved both 'macroeconomic stability' and 'financial market stability'.