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2023 | OriginalPaper | Buchkapitel

6. Inflation Dynamics and Monetary Policy in Taiwan

verfasst von : Michael C.-Y. Yang

Erschienen in: Inflation and Deflation in East Asia

Verlag: Springer Nature Switzerland

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Abstract

Like many small open economies, Taiwan’s domestic prices are susceptible to international price volatility (e.g., crude oil prices) and seasonal fluctuations. Considering these transitory factors, the Central Bank of the Republic of China (Taiwan) has long-defined price stability, in accordance with the government’s macroeconomic targets of keeping inflation below 2%, as an annual growth rate of the consumer price index (CPI) in the range of 0–2% over the medium term. In the past 20 years, inflation has remained low and stable in Taiwan, with the CPI growing at an average annual rate of 1%. Because of a low and stable inflation environment, inflation expectations are well-anchored, which, in turn, helps to keep domestic inflation under control. However, the recent surge in global price levels due to the Covid-19 pandemic, supply chain bottlenecks, and the war in Ukraine, has brought inflation back to the forefront of monetary policy. Many countries have identified the elevation in price pressures as a potential threat to their economies, and Taiwan is no exception.

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Vorheriges Kapitel Inflation Dynamics and Expectations in Singapore

Nächstes Kapitel Why Has There Been No Inflation in Japan?

The PPI is mainly driven by products such as petroleum and coal, basic metals, and chemical materials.

An empirical study by Hsu (2022) suggests that the better anchored long-term inflation expectations have weakened the impact of oil price shocks on Taiwan’s CPI since 2003.

Economies such as Japan, Singapore, and Thailand also have relatively low inflation and stable prices.

The inflation forecasts published by Consensus Economics in April 2022 indicate that Taiwan’s long-term inflation expectations (CPI annual average between 2028 and 2032) are still under 2%.

The National Development Council (NDC) has revised the price stability target for 2021–2024. The new target aims to keep the four-year average core CPI inflation rate in the range of 1–1.5%.

For detailed information please, see CBC (2006).

This can be simply illustrated using the Fisher equation: \(r = i - \pi^{e}\), where r denotes the real interest rate, i is the nominal interest rate, and \(\pi^{e}\) stands for expected inflation.

The difference between 10-year nominal Treasury yields and 10-year TIPS yields, also known as the 10-year breakeven inflation rate, reflects the market participants’ expectations of future inflation.

The survey of Asia-Pacific Consensus Forecasts (APCF) published by Consensus Economics Inc. is, by far, one of the most widely cited surveys in the Asia-Pacific region.

The paper follows Kim and Lee’s (2013) methodology and constructs the 12-month ahead inflation expectations using the weighted average of the multiple forecasts in the survey data. Actual inflation, on the other hand, is calculated by using the 12-month moving average of realised CPI inflation. For detailed discussions please, see Kim and Lee (2013).

The survey provides long-term inflation expectations for the following five years and the average annual rate between the 6th and the 10th year. The data are only available on semi-annual frequency (April and October), and the first available observation begins at October 2009.

In a 2007 speech, the then Fed Chair Ben Bernanke stated: “With inflation expectations well anchored, a one-time increase in energy prices should not lead to a permanent increase in inflation but only to a change in relative prices.” See Bernanke (2007).

The empirical methodology in this chapter is identical to the ones in Chang (2014).

The AIC and BIC are standard statistical tests to determine the appropriate number of lags to be included as regressors. Including too few lags in the model may result in an estimation bias, while including too many lags may inflate the standard errors of coefficient estimates.

Bootstrapping is a statistical technique that re-samples (with replacement) a single dataset to generate multiple simulated samples. The chapter utilises this technique to construct 90% confidence intervals from the re-sampling distributions.

The other dominant factor is food prices.

The PPI data are not available before January 2021, so the chapter uses the wholesale price index (WPI) as a proxy. The WPI data for Taiwan starts from January 1981.

The types of prices collected are also different between the two indices. The price collected for each item in the PPI is simply the revenue received by the producer, whereas the price collected for each item in the CPI is the after-tax price (including producer prices, sales, excise taxes, etc.) paid by the consumer.

Fuel prices in Taiwan are determined by a floating oil pricing mechanism that is strongly tied to the prices of petroleum products.

A weakening NTD against the USD tends to raise import prices, resulting in higher domestic prices.

Although the CBC is responsible for maintaining the stability of the external value of its currency, the NTD exchange rate is, in principle, determined by market forces. In other words, the CBC does not peg the NTD at a fixed rate to any currency or a basket of currencies. Instead, the CBC aims to prevent excess volatility and disorderly movements in the NTD exchange rate when massive short-term capital flows lead to economic and financial instability. See Tsao (2020) for more information on exchange rate policy in Taiwan.

Governor Ching-Long Yang disclosed the simulation results at the press conference following the second quarter board meeting on 16 June 2022.

The price stabilisation task force, convened by the Vice Premier of the Executive Yuan, is an inter-departmental government unit that works under the advisory of the NDC. The task force comprises the Ministry of Economic Affairs, the Ministry of Interior, the Ministry of Transportation, the Ministry of Finance, the Ministry of Justice, the Ministry of Health and Welfare, the Central Bank of the Republic of China (Taiwan), the Council of Agriculture, the Directorate-General of Budget, Accounting and Statistics, the Fair Trade Commission, etc.

The government policy requires Taiwan to have the lowest fuel prices among neighbouring Asian countries (Japan, Hong Kong, South Korea, and Singapore). Thus, state-owned petroleum firms are responsible for absorbing the price hike if crude oil prices go up.

Bernanke, B. S. (2007, July 10). Inflation Expectations and Inflation Forecasting. Remarks at NBER Monetary Economics Workshop.

Bonatti, L., Fracasso, A., & Tamborini, R. (2022, February). What to Expect from Inflation Expectations: Theory, Empirics and Policy Issues (Monetary Dialogue Papers). European Parliament.

Central Bank of the Republic of China (Taiwan). (2006, October). The Central Bank of China (Taiwan): Purpose and Functions (1992–2004). State Bookstore.

Central Bank of the Republic of China (Taiwan). 中央銀行. (2022, March 17). Analysing Taiwan’s Inflation Trend in 2022 Using the CPI and the PPI (從 CPI 與 PPI 之關係分析台灣本年通膨走勢). Supplementary Written Materials (3), 30–47, Monetary Policy Decision of the Board Meeting, 央行理監事會後記者會參考資料. (In Mandarin).

Chang, C.-Y. 張志揚. (2014). Investigating the Dynamic Relationship Between Inflation Expectations and Macroeconomic Variables in Taiwan. 台灣地區通膨預期與總體變數動態關係之探討. Quarterly Bulletin of the Central Bank of the Republic of China (Taiwan), 中央銀行季刊, 36(6), 51–74. (In Mandarin).

Hsu, W.-J. 徐婉容 (2022). Oil Price Shocks, Inflation Expectations and Monetary Policy: Evidence from Taiwan. 油價、通膨預期與貨幣政策: 台灣個案研究. Taiwan Economic Review, 經濟論文叢刊 50(1), 87–133. (In Mandarin).

Kim, J., & Lee, J. (2013). How Important Are Inflation Expectations in Driving Asian Inflation? (BIS Paper No. 70f). http://ssrn.com/abstract=2249701

Manule, B., & Pugh, A. (2013). Do Inflation Expectations Currently Pose a Risk to the Economy? Bank of England Quarterly Bulletin, Second Quarter, 110–121.

Tsao, T.-J. (2020). Taiwan’s Exchange-Rate Policy and Its Current Challenges. In F. Rövekamp, M. Bälz, & H. G. Hilpert (Eds.), Monetary Policy Implementation in East Asia (pp. 61–71). Springer.CrossRef

Titel: Inflation Dynamics and Monetary Policy in Taiwan
verfasst von: Michael C.-Y. Yang
Verlag: Springer Nature Switzerland
Buch: Inflation and Deflation in East Asia
Print ISBN: 978-3-031-27948-5

Electronic ISBN: 978-3-031-27949-2

Copyright-Jahr: 2023
DOI: https://doi.org/10.1007/978-3-031-27949-2_6