Post-War Taiwan's Business Cycles: The Small Open Economy and the International Capital Mobility

This paper builds a small-open-economy interemporal optimal model to explain post-war Taiwan's business cycles. We introduce transaction costs into the international capital market to explore the effects of international capital mobility on business cycles. We also compare the fit of the small open economy model with a colsed economy model. We determine the fit of the models in two ways. The first is the traditional method comparing the model's moments with those of the actual economy and the second is the method developed by Watson (1993). Both approaches indicate that, with imperfect international capital mobility, the-small-open economy model can successfully mimic the characteristics of post-war Taiwan business cycles. Furthermore, the technology shock and foreign interest rate shock are the important sources of the post-war Taiwan's business cycles.