5.3 Lower Degree of Price Stickiness - Optimal Monetary Policy for Taiwan: A Dynamic Stochast

In the benchmark model, we assume the degree of price stickiness ξ_dto be 0.75, which implies an average price-change duration of 4 quarters following the conventional set-ting based on the estimates for European countries. However, the estimation of price stickiness based on the Taiwanese data provided by Teo (2009) shows that prices in Taiwan may be less sticky than in Europe, being only 0.635 when associated with 2.74 quarters of price rigidity. The results under lower price stickiness are reported in col-umn (B) in Table 9. These results show that the optimized monetary aggregate rule is slightly more persistent than that under higher price rigidity, while the optimized interest rate rule tends to attach less effort to stabilizing the CPI inﬂation. With higher price ﬂexibility, the ﬂuctuations in the economy become greater, but the welfare levels are raised up. Implementing the monetary aggregate rule is still welfare improving.²²

22The factor that determines the welfare dominance of the monetary aggregate rule remains an interest-ing issue for future study. As discussed above, the factors considered in the sensitivity analyses, includinterest-ing the ﬁnancial friction, are not the determinants. It is natural to conjecture that trade openness can be the key factor in the monetary policy for a small open economy which can be strongly affected by external shocks and exchange rate variations. To examine this issue more carefully, we calibrate the model under alternative degrees of trade openness whereα^m = 0.6, α^m = 0.1, and under a closed economy ac-cording to the speciﬁcation in Goodfriend and McCallum (2007). The monetary aggregate rule remains welfare superior to the interest rate rule in all cases, but the welfare under each of these two policies be-come closer to each other whenα^mdecreases. Thus, trade openness can be the factor that inﬂuences the welfare level of monetary policy, but not the determinant of welfare superiority of the monetary aggregate rule. In a more open economy, the foreign shocks and exchange rate ﬂuctuations have greater impacts on the economic variations. As a result, the optimized monetary aggregate rule, which is characterized by strong exchange rate stabilization, can be more effective in reducing the inﬂation rate ﬂuctuations. When α^m= 0.6, the standard deviation of the inﬂation rate is 0.8% under the optimized interest rate rule and is 0.76% under the optimized monetary aggregate rule. Since we have not found the condition under which the interest rate rule can strictly dominate the monetary aggregate rule, more efforts may be required to check whether the alternative speciﬁcations of the model can make the interest rate rule welfare superior to the monetary aggregate policy.

6. C ONCL US ION

In this paper, we investigate the optimal monetary policy for Taiwan by using a micro-based DSGE model with a frictional banking sector. The focus of this study is the welfare examination of monetary policies in response to various shocks. We investi-gate the welfare implications of the money growth rate rule which is the announced monetary policy rule of Taiwan’s central bank at present, and the alternative Taylor-type interest rate rule. The welfare assessment shows that the money growth rate rule can be welfare superior to the interest rate rule. Without speciﬁc inﬂation or exchange rate targeting, the calibration results show that the optimized money growth rate rule can stabilize the economy better than the optimized interest rate rule. The volatilities of the output, inﬂation and exchange rates under the money growth rate rule are lower than those under the interest rate rule. With the direct relevance of the monetary aggre-gate lying with consumption and output, the control of the money growth rate rule can help stabilize both the nominal and real variables. This result supports the monetarists’

view.

The welfare ranking of these two policy rules also holds for alternative speci-ﬁcations of the model: a highly efﬁcient credit market, greater international capital friction, and lower nominal rigidity, the latter two of which may better characterize the Taiwanese economy while the benchmark case uses the parameter values obtained from the mainstream literature, are the estimates from the US and European countries.

Two of the analyses are also worth noting here. First, the inclusion of the banking sector allows us to examine the optimal policy responses to the adverse shocks to the credit market. We show that the interest rate rule can be welfare dominating vis-`a-vis the money growth rate rule, but generates a less desirable outcome in causing a sharper decline in employment during the recession. Secondly, the estimated monetary policy of Teo (2009) follows the optimized monetary aggregate rule in this study in a similar fashion, but with lower weights for the inﬂation and exchange rate stabilization. This policy therefore generates greater macroeconomic volatilities and results in a larger welfare loss.

We conclude this paper by mentioning some interesting issues for future research.

First of all, we may instead consider the welfare ranking of several simple monetary rules for Taiwan, such as inﬂation targeting and exchange rate peg policies as in

Suther-land (2006), under this framework. This may provide the better insight for welfare consideration of exchange rate variations which remain the main concern for Taiwan.

Secondly, and ﬁnally, it would be interesting to examine whether the monetary pol-icy should react to the asset price. This has been an important issue recently and the stability of the asset market has been the primary concern for Taiwan.

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在文檔中 Optimal Monetary Policy for Taiwan: A Dynamic Stochastic General Equilibrium Framework (頁 31-36)