Topic：Fiscal Obligation and the Central Bank's Monetary and Exchange Rate Policies: The Case of Taiwan

Speaker：Hung-Jen Wang

Affiliation: National Taiwan University

Time：2:00-3:30pm, October 16

Location：Room 217, Guanghua New Building

Speaker’s CV：Download PDF

Abstract: The Central Bank of the Republic of China (Taiwan), henceforth CBT, is required by the CBT Act to submit 50% to 80% of the annual profit to the Treasury (profit paid to the Treasury, PPT). In this paper, we study how the fiscal obligation affects CBT's monetary and exchange rate policies. We first demonstrate using a theoretical model that, under the fiscal obligation, CBT's policy conducts may be distorted towards generating profits, which may be in conflict with CBT's stated goals. Next, we derive empirical equations of interest rate and foreign exchange intervention from the theoretical model, and estimate the equations using threshold regressions. We find that CBT's responses to different economic regimes are asymmetric. In the regime of fast increasing PPT, i.e., when the financial burden from fiscal obligation increases, CBT tends to accumulate more foreign reserves (generating more interest earnings) and lower the interest rate (reducing interest payments to outstanding securities). However, the same behavior is not observed in the alternative regime. The results suggest that, when subject to fiscal obligation to the central government, CBT's policies are biased toward generating profit at the expense of stated missions of the central bank.