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Measuring Monetary Policy in a Small Open Economy with Managed Exchange Rates: The Case of Taiwan
Author(s) -
Ho Tai-kuang,
Yeh Kuo-chun
Publication year - 2010
Publication title -
southern economic journal
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.762
H-Index - 58
eISSN - 2325-8012
pISSN - 0038-4038
DOI - 10.4284/sej.2010.76.3.811
Subject(s) - monetary policy , economics , monetary economics , exchange rate , shock (circulatory) , identification (biology) , credit channel , small open economy , open economy , impulse response , inflation targeting , sign (mathematics) , macroeconomics , medicine , mathematical analysis , botany , mathematics , biology
We use sign restrictions to identify monetary policy for a small open economy with heavily managed exchange rates. We apply the proposed sign restrictions to the Taiwanese case, where existing studies tend to find no clear effect of monetary policy shocks on the output and price level. Our principal findings are that a contractionary monetary policy shock causes a permanent and significant decline in real gross domestic product, broad money, and price level. Our identification scheme is able to avoid the puzzling impulse responses from which other identification schemes more or less suffer. The fact that monetary policy has not been correctly identified may have led existing studies to conclude that monetary policy is ineffective.