Capital Market Integration with Multiple Convergence Clubs: The Case of Prewar Japan
Tetsuji Okazaki and
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Tetsuji Okazaki: Faculty of Economics, The University of Tokyo
Koji Sakai: Division of Economics, Kyoto Sangyo University
No CARF-F-475, CARF F-Series from Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo
This paper examines capital market integration in prewar Japan, using a methodology that allows for multiple equilibria in convergence. Specifically, we apply the method of log t regression and the club convergence test proposed by Phillips and Sul (2007) to examine the convergence of prefectural loan rates and detect the convergence clubs that followed heterogeneous transition paths. Whereas prefectural loan rates were converging towards two equilibria from 1888â€“1900, all the prefectural loan rates converged towards a unique equilibrium from 1901â€“1926. From 1927, however, the prefectural loan rates diverged again, and four different convergence clubs emerged. Restrictive regulation imposed by the Bank Law of 1928 reduced competition in local markets, increased barriers to interregional capital mobility, and, thereby, reversed capital market integration.
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