Monetary Policy in Taiwan, China

Abstract

The main purpose of this chapter is to examine how Taiwan, China, has used monetary policy to deal with the inflationary impact of the two oil shocks since 1973, and with the more recent problem of a very large rise in foreign exchange holdings. In the open economy of Taiwan, with its heavy reliance on export-led growth, this rise in foreign exchange holdings has sharply expanded the money supply and has created a major challenge to monetary policy’s basic goal of maintaining price stability. This chapter describes the basic structure of the financial and foreign exchange systems, discusses recent regulatory changes, and encapsulates the major economic developments since the first oil shock. The central bank’s arsenal of monetary instruments and their past uses are then examined, particularly with regard to the large foreign exchange inflow in recent years. Lastly, the central bank’s monetary policy performance is assessed, with some suggestions made for additional research on certain topics.