Using Modified Taylor Rule to Assess Taiwan’s Monetary Policy in a Small Open Economy
Date Issued
2010
Date
2010
Author(s)
Wang, Yi-Wen
Abstract
According to Dornbusch(1976), we construct a small open economy model, and adapt the uncovered interest parity (UIP) to imperfect capital mobility by adding risk premium. Under the framework of small open economy, we view a loss function as central bank’s objective function after referring to Kydland and Prescott(1977) and bring exchange rates into the loss function; then from all of settings characterized in this paper, we derive modified Taylor Rule which can describe monetary policy rules constituted by foreign exchange intervention and sterilized intervention. This modified Taylor Rule has two different types: successful and unsuccessful intervention. In the condition of successful intervention, the rule has constant coefficients; while in the condition of unsuccessful intervention, the rule has flexible coefficients which will vary with time and policy objectives. Following, we use monthly data from January, 1996 to April, 2010 to make econometric analysis with the method of generalized method of moments (GMM) and assess Central Bank of the R.O.C.’s monetary policy rules for the last ten years. In addition, we build an intervention index which can be used to measure the extent of central bank’s intervening attitude. We find that Central Bank of the R.O.C. performs an aggressive intervening attitude during the periods of January, 2000 to July,
2001, May, 2007 to January, 2008 and April, 2009 to April, 2010.
Subjects
Taylor Rule
foreign exchange intervention
sterilized intervention
Type
thesis
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