The effects of monetary policy: a DSGE model analysis of Taiwan

Abstract

This article attempts to use empirical data to analyse the impact of monetary policy in a dynamic stochastic general equilibrium model. According to the monetary policy decisions of the Central Bank of China (Taiwan), maintaining price, financial stability and fostering economic growth are the ultimate goals of monetary policy during the empirical period. First, this article uses the cointegration tests to determine the operating targets, the intermediate targets and the ultimate goals of monetary policy. Then, a forward-looking aggregate demand–aggregate supply model for a small open economy is specified, and policy discretion is included in this model. Finally, the model is estimated by a linear state space model and is used to analyse the short-run effects of a systematic monetary change.

Acknowledgements

We appreciate the suggestions of anonymous referees who helped to clarify some issues. Any errors in this article are of our own responsibility.

Notes

¹ YF is the natural log-levels of weighted average of seasonally adjusted real income of Taiwan's 15 main trading countries and districts (including Canada, United States, Australia, France, Germany, The Netherlands, United Kingdom, China, Hong Kong, Indonesia, Japan, Republic of Korea, Malaysia, Singapore and Thailand); unit: billions of 1996 US dollar; data source: AREMOS/INTLINE and TRADE data banks. The deterministic long-run trend of YF is estimated using Holt–Winters additive seasonal exponential smoothing model.

²The results are found using Box–Jenkins (1976), augmented Dickey–Fuller (1979), Phillips–Perron (1998), GLS-detrended Dickey–Fuller (Elliot et al., 1996), Kwiatkowski et al. (1992), Elliott et al., Point Optimal (1996) and Ng and Perron (2001) unit-root tests (Eviews 4.1, 2002).