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Measuring Monetary Policy in a Small Open Economy with Managed Exchange Rates: The Case of Taiwan

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  • Tai-kuang Ho
  • Kuo-chun Yeh

Abstract

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.

Suggested Citation

  • Tai-kuang Ho & Kuo-chun Yeh, 2010. "Measuring Monetary Policy in a Small Open Economy with Managed Exchange Rates: The Case of Taiwan," Southern Economic Journal, John Wiley & Sons, vol. 76(3), pages 811-826, January.
    • Handle: RePEc:wly:soecon:v:76:y:2010:i:3:p:811-826
    DOI: 10.4284/sej.2010.76.3.811
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    Cited by:

    1. Bünyamin Fuat Yıldız & Korhan K. Gökmenoğlu & Wing-Keung Wong, 2022. "Analysing Monetary Policy Shocks by Sign and Parametric Restrictions: The Evidence from Russia," Economies, MDPI, vol. 10(10), pages 1-16, September.

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