Budgetary Requirement and the Central Bank's Monetary and Exchange Rate Policies: The Case of Taiwan
Date Issued
2012
Date
2012
Author(s)
Liu, Judith
Abstract
This paper studies the monetary and exchange rate policies of the Central Bank of the Republic of China (CBC) under the requirement of profits to be paid to the Treasury (PPT). We first demonstrate using a theoretical model that the CBC’s policy conducts might be distorted towards gaining more profits under such requirement, which is not necessary in accordance with the CBC’s primary objectives. Next, using threshold regressions, we estimate the reaction functions of the interest rate and the foreign exchange intervention derived from the theoretical model. We find that the CBC’s responses to different economic regimes are asymmetric. For instance, in the regime of PPT growth, the CBC tends to lower the interest rate and raise the value of foreign assets when the financial burden from budgetary requirements increases. The same is not observed in the alternative regime. The above effects suggest that the CBC’s policies might bias toward fulfilling the budgetary obligations. In addition, the effects of PPT on the CBC’s policies become more salient after 1998, showing an increasing influence of PPT on the CBC’s policies in the recent decades.
Subjects
Profits to be paid to the Treasury
Monetary policy
Exchange rate policy
Reaction function
Threshold regression
Type
thesis
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