Taiwan’s Exchange-Rate Policy and Its Current Challenges

Cross-border capital flowsCapital flowCross-border capital flow account forCross-border capital flowCapital flow a significant share of Taiwan’s interbank foreign exchange transactionsForeign exchangetransactions, and some active foreign investorsForeign investors play a key role in the total of foreign capital flows. Large and frequent short-term capital movementsCapital movement pose one of the major threats to financial stabilityFinancial stability/instability in Taiwan. Confronted with this challenge, the Central Bank of the Republic of ChinaCentral Bank of the Republic of China, Taiwan (CBC) (Taiwan), or CBC, employs a range of measures to manage the foreign exchange marketForeign exchangemarket and capital movements. This practice fulfils the CBC’s legal mandate of maintaining the stable value of the new Taiwan dollarNew Taiwan Dollar (NTD) (NTD) to underpin economic growthEconomic growth in Taiwan. Because of great dependency on imported energy, high foreign portfolio investmentPortfolio investment, the lack of International monetary FundInternational Monetary Fund (IMF) (IMF) membership and reserve currencyReserve currency status, Taiwan’s reserve holdings stay at a relatively high level, which provides a necessary buffer to reduce excess volatilityVolatility in the NTD exchange rate, instead of any attempt at competitive depreciation.