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7. Conclusion
In this paper, we investigate the optimal monetary policy of Taiwan by using a micro-based dynamic stochastic general equilibrium (DSGE) model with the banking sector. The discussions focus on two aspects. First, we analyze the results of steady state. We find that the banking sector is an important role in Taiwanese economy. In costly banking sector, the liquidity service yield on collateral would affect some variables. Second, we investigate the performances of four types of monetary policies rules: monetary aggregate growth rate rule, interest rate rule with CPI targeting, interest rate rule with domestic goods inflation rate targeting, and interest rate rule with exchange rate targeting. The results show that the monetary aggregate growth rate rule can be welfare superior to the other policies and stabilize the output, CPI, domestic goods price inflation rate and exchange rate. Also, highly capital mobility friction and highly trade openess would increase the welfare of Taiwanese economy.
We conclude this paper by providing some interesting issues for future research.
First of all, the house and foreign bond could be included as collateral. It would be interesting to examine whether the monetary policy should react to the asset price.
Furthermore, we discuss the simple rules of monetary policy in this paper. In reality, the central bank may use more complex instrument to carry out the monetary policy.
It would be interesting to consider mixed strategy.
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Appendix
Table 1 Parameter values (on quarterly basis)
Parameter Description Value
The importance of consumption in the utility function 0.49
Capital share in goods production 0.36
Discount rate 0.99
Depreciation rate of capital 0.025boc Real government bond / consumption bundle 1.194
V
Velocity of aggregate bank deposits 0.134rr
Reserve rate 0.054
Collateral share in loan production 0.7F
Efficiency parameter of banking sector 7.6k
Inferiority of capital to bonds for collateral purposes 0.55
m Ratio of import goods to aggregate consumption in the steady state 0.43
d Ratio of domestic goods to aggregate consumption in the steady state 0.57
Elasticity of substitution among different variety of goods 6
Elasticity of substitution between domestic goods and imported goods 5
Price elasticity of demand for export 5P
The rest of the world price index 0.84
The degree of capital mobility 0.0019‧ 國
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Table 2 Steady-state values
Benchmark calibration (quarterly data; zero inflation;
F 7.6
)w C C
Am n
1.8792 1.1064 1.3905 0.0097 0.3436
b b
K
1.3217 17.9727 0.1023 11.3626 0.4197
R
TR
IBR
LR
BR
KEFP
0.01 0.0022 0.0046 0.0043 0.0069 0.0024
Highly efficient banking (
F 80
)w C C
Am n
1.7829 1.1023 1.3570 0.000 0.3564
b b
K
1.3167 16.5306 0.1115 10.1857 0.4444
R
TR
IBR
LR
BR
KEFP
0.01 0.01 0.01 0.01 0.01 0.000
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Table 3 Welfare and Standard deviations
MA CPIT DPT ERT
Benchmark model (policy parameter=50)
Welfare
a 0.173277 0.111891 0.108199 0.110957Standard deviations
Output 0.0342 0.0506 0.0482 0.0498
Consumption 0.0231 0.0093 0.0079 0.0087
CPI inflation rate 0.0100 0.0130 0.0126 0.0128
Non-traded goods inflation rate 0.0045 0.0084 0.0080 0.0082
Exchange rate 0.0084 0.0115 0.0111 0.0114
Highly capital mobility friction (0.01)
Welfare
a 0.173291 0.113516 0.109371 0.112572Standard deviations
Output 0.0344 0.0508 0.0482 0.0500
Consumption 0.0231 0.0089 0.0074 0.0083
CPI inflation rate 0.0100 0.0130 0.0125 0.0128
Non-traded goods inflation rate 0.0044 0.0083 0.0079 0.0082
Exchange rate 0.0083 0.0115 0.0110 0.0113
Highly openness (
m0.53)Welfare
a 0.20401 0.119365 0.119214 0.119333Standard deviations
Output 0.0524 0.0688 0.0687 0.0688
Consumption 0.0311 0.0037 0.0037 0.0037
CPI inflation rate 0.0149 0.0177 0.0177 0.0177
Non-traded goods inflation rate 0.0058 0.0101 0.0101 0.0101
Exchange rate 0.0138 0.0166 0.0166 0.0166
Note. MA is the monetary aggregate growth rate rule. CPIT refers to the interest rate rule with CPI targeting. DPT refers to the interest rate rule with domestic goods inflation rate targeting. ERT refers to the interest rate rule with exchange rate targeting. In the benchmark model, we set 0.0019 and
m 0.43
.