The Determinants of Interest Rates in Taiwan: An Application of the Augmented ISLM Model

Abstract

Interest rates for Taiwan are modeled and examined by applying an augmented ISLM 1nodel incorporating the exchange rate, the Fisher hypothesis, the world interest rate, and the partial adjustment model. The nonlinearity test shows that the linear fonn instead of the Iogarithtnic form is appropriate for the function of the equilibrium interest rate. The estimated regression indicates that the nominal interest rate in Taiwan is positively correlated with govern1nent spending, expected inflation rates, U.S. interest rates, and negatively associated with government tax revenues, real M2 money, and the real exchange rate. (El, F4, 01)