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Modelling Money Shocks in a Small Open Economy: The Case of Taiwan
Author(s) -
Binner Jane M.,
Kelly logan J.
Publication year - 2017
Publication title -
the manchester school
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.361
H-Index - 42
eISSN - 1467-9957
pISSN - 1463-6786
DOI - 10.1111/manc.12179
Subject(s) - divisia index , economics , divisia monetary aggregates index , exchange rate , small open economy , monetary policy , monetary economics , liberian dollar , index (typography) , econometrics , price index , broad money , autoregressive model , macroeconomics , central bank , bank rate , mathematics , finance , computer science , statistics , world wide web , energy (signal processing) , energy intensity
This paper explores the relevance of the Divisia monetary aggregate in Taiwan over the period January, 1985 through to June, 2016. We apply a block recursive structural Vector Autoregressive (VAR) approach that is adapted to a small open economy by adding the New Taiwan Dollar/US Dollar exchange rate to the block of economic activity indicators. We test the hypothesis that measures of money constructed using the Divisia index number formulation are superior indicators of monetary conditions when compared to the central bank's main policy rate, the Taiwanese discount rate. We find that using properly measured monetary data solves short‐run price, output and exchange rate puzzles and leads to sensible long‐run impulse responses to monetary shocks. Future work on the optimization of the construction of the Divisia index number formulation is recommended.