Deflation and Monetary Policy in Taiwan

Ya-Hwei Yang, Jia-Dong Shea

NBER Working Paper No. 11244
Issued in April 2005
NBER Program(s):   IFM   ME

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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Document Object Identifier (DOI): 10.3386/w11244

Published:

• 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.
• Deflation and Monetary Policy in Taiwan, Jia-dong Shea, Ya-Hwei Yang. in Monetary Policy with Very Low Inflation in the Pacific Rim, NBER-EASE, Volume 15, Ito and Rose. 2006

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