Chapter 12 - Monetary Policy in Taiwan: The Implications of Liquidity

Abstract

This chapter aims to investigate the construction of monetary aggregates in Taiwan using a monthly data series from January 1, 1970 to December 2013 inclusive. Taiwan is a country of great economic interest in the post-recession era. Financial innovation in Taiwan has been vast, outpacing that in the USA and UK; moreover the money supply still plays a key role in monetary policy making in Taiwan. This is in contrast to the UK and USA where money’s role has been downgraded to just one of many leading indicators of inflation. Our work uses a structural VAR approach to assess the performance of sophisticated Divisia indices in a small macroeconomic model. Future research will investigate the incorporation of risk aversion and utilize the prominent role money plays in Taiwanese policy to conduct counter-factual comparative studies of money-based vs. interest rate-based inflation targeting policy regimes.