An Econometric Analysis of Money Demand in Taiwan, 1950–1989

Abstract

This paper is an empirical study of the demand for money in Taiwan, a small open economy. Alternative hypotheses of the short-term adjustment process are tested, and the results support the error-correction adjustment process. The results further suggest, based on a battery of tests, that the estimated error-correction money demand equation is temporally stable. Focus is also given to the open-economy nature of the money demand model, and the results indicate that some measure of foreign interest rates plays a significant role in Taiwan money demand behavior. Monetary policy in Taiwan, therefore, must take into account the response of domestic money demand to changes in such factors.