The Impact of Real Effective Exchange Rate Fluctuations on Outputs: A Comparative Analysis of Taiwan and Japan
Date Issued
2006
Date
2006
Author(s)
Lin, Hao-Yuan
DOI
zh-TW
Abstract
This thesis intends to investigate the impact of real effective exchange rate (REER) fluctuation on Taiwan and Japan’s real output (GDP). Discovered by existing literature and previous research, the depreciation effects of domestic currency on output are not consistent. Following Asia financial crisis during 1997, many currencies of Southeast Asia Countries dramatically depreciated. Nevertheless, their outputs had not been increased. The result contradicted with traditional theories, which is considered to be stimulating economic growth by changing relative prices of goods between home and foreign countries. Taiwan is a small open economy whereas Japan is large. Therefore, international trade is very important for their economic growth, hence to examine the extent of variation on REER under different open economy scales.
The empirical analysis was based on Agenor’s (1991) theoretical model and adopted econometrics methods including unit root test, Johansen cointegration test and VECM. Employing the time series data of both Taiwan and Japan was over the 1980I-2004IV period. From our empirical results: the depreciation of REER on Taiwanese NT dollar and Japanese Yen had expansion effect on output in the short-run. In the long-run, the depreciation of REER on Taiwan had expansion effect, but not significant on Japan Yen. By cointegration analysis, it discovered they had a long-run positive relationship between output and foreign trade dependence. Hence, it revealed increase in international trade benefited economic growth.
The depreciation effect of the local currency is like two edges of a sword, it depends on the relative effects between the expansion on aggregate demand and the contraction on aggregate supply. Since the total amount of foreign trade in Taiwan and Japan accounts for sizable proportions of GDP, the effect may be lower than expectation if the governments desire to stimulate economic growth by depreciation. Compared with nominal exchange rate, REER contributes to one country's policy making even more. As to Taiwan and Japan, maintaining REER relative stability would reduce unnecessary exchange rate risk cost while the two counterparts proceed with trade. Consequently, the exchange rate policy is not only deliberated from price competitiveness, but is also considered as the time-span effects of impact on domestic economics, and the linkage between global economies.
Subjects
實質有效匯率
貿易依存度
單根檢定
向量誤差修正模型
共整合分析
衝擊反應函數
Real Effective Exchange Rate (REER)
Unit Root test
VECM
Cointegration test
Impulse Response Function
SDGs
Type
thesis
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