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Deflation and Monetary Policy in Taiwan

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  • Ya-Hwei Yang
  • Jia-Dong Shea
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    Abstract

    From 1999 to 2003, Taiwan faced a deflationary situation. The reasons for this deflation can be attributed to both domestic and global factors. Domestic changes including local political unrest, tensions with China, outbound investment to China, a weakened financial system, and a deteriorating government financial situation, provided the backdrop for the economic slowdown and corresponding deflation. A number of global factors, especially the bursting of the Internet and IT bubbles in late 2000 and the rise of China's economy, also heavily influenced both global and Taiwanese prices. This paper adopts a simplified aggregate demand and aggregate supply model to derive a deterministic equation of the GDP deflator (PGDP), and then applies quarterly data covering the period from 1982 to 2003 to estimate the PGDP equation using 2SLS. The empirical results are used to identify the sources of PGDP deflation in Taiwan. In addition, the phenomenon of price divergence appears since 2002 where the WPI increased and the CPI decreased. The causes of the WPI-CPI divergence are also investigated in this paper.

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    Bibliographic Info

    Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 11244.

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    Date of creation: Apr 2005
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    Publication status: published as Ito, Takoshi and Andrew K. Rose, eds. Monetary Policy with Very Low Inflation in the Pacific Rim (National Bureau of Economic Research-East Asia Seminar on Economics). Chicago, IL: University of Chicago Press, 2006.
    Handle: RePEc:nbr:nberwo:11244

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    1. Agénor,Pierre-Richard & Miller,Marcus & Vines,David & Weber,Axel (ed.), 1999. "The Asian Financial Crisis," Cambridge Books, Cambridge University Press, number 9780521770804, April.
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    Cited by:
    1. Lee, Hsiu-Yun & Chen, Show-Lin, 2006. "Why use Markov-switching models in exchange rate prediction?," Economic Modelling, Elsevier, vol. 23(4), pages 662-668, July.

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