Exchange rate experiences of a small open developing country: Taiwan (China)

The purpose of this study is three-fold. First, this paper examines the extent of the monetary independence that the monetary authorities can pursue under the pegging exchange rate system. A second objective is to investigate the applicability of the monetary approach to the exchange rate determination to the NT{dollar}/US{dollar} rate. The third purpose is to discuss the Central Bank of China's intervention policy under the managed floating exchange rate system.; Basic findings for the monetary independence model presented in Chapter III are: First, expansion of domestic credit seems to have some impact on the balance of payments, as predicted by MABOP. The estimated offset coefficient {dollar}(-{dollar}0.56), while substantial, is significantly different from minus one. Second, as shown by the estimated sterilization coefficient {dollar}(-{dollar}1.39), the conclusion is made that part of the observed negative correlation between @NFA and @NDA is likely to be the result of official sterilization policy.; A sterilization coefficient of this magnitude suggests that the authorities have been able to insulate the economy from the monetary effects of reserve flows. Thus, inflation would not appear to have been imported through the monetary channel.; Contrary to other empirical evidence on the monetary approach to the exchange rate determination, the empirical studies using NT{dollar}/US{dollar} rate do not provide much empirical support for the theoretical models developed by the monetary approach.; Four intervention equations were estimated using the ordinary least square (OLS) for the quarterly NT{dollar}/US{dollar} rates for the period 1979.II through 1985.IV. The results strongly support the hypothesis that the Central Bank of China has leaned against the wind by smoothing the fluctuations of the nominal NT{dollar}/US{dollar} rates during the period of managed floating exchange rates (1979.II-1985.IV). The inclusion of another leaning-against-the-wind term (change in the effective exchange rate) helped explain Taiwan's intervention policy, but the insignificance of the term suggests that the Central Bank of China had no strong desire to smooth the fluctuations of the effective exchange rates.