The Monetary Model of the Balance of Payments: Applications to Taiwan

Abstract

This paper estimates a monetary model of the balance of payments of Taiwan with quarterly data from 19661978. In contrast to previous studies, it estimates two forms of the model: with and without a central bank reaction function that assumes sterilization. The estimated coefficients of the models are compared to the estimates of previous studies including studies that estimate income and interest ra~ elasticities of demand for money in Taiwan by the conventional approach. The results of the empirical work indicate that although th<> offset oo<>fficients equal about -1.00, th<> Taiwan Central Bank attempts to sterilize all of the <>ffoots on th<> money supply of its intervention in the foreign exchange market. It is doubtful that such • policy is successful, and it is likely to lead to large fluctuations in international reserves. (F3)