Who Paid for the Profits of Taiwan's Central Bank?

We analyze the interaction between the Taiwan central bank's profits and its policies. To earn large and consistent profits, the Taiwan central bank significantly expanded its balance sheet and relied on inexpensive short-term domestic funding to invest in longer-term foreign debt securities. In doing so, the central bank engineered a massive duration and currency mismatch on its balance sheet to capture term and currency risk premiums. We also argue that these large profits could not have been realized without a low rate policy combined with heavy regulations on domestic financial institutions. These regulations function like a tax on the returns of private overseas investments, effectively trapping funds within the domestic financial system. Ultimately, the profits earned by the central bank are, in effect, an implicit tax revenue levied on domestic depositors.