Is Taiwan''s general price level perfectly flexible?

• Main Authors: Yeh-Hong Chao, 趙億豐
• Other Authors: Lii-Tarn Chen
• Format: Others
• Language: zh-TW
• Published: 2002
• Online Access: http://ndltd.ncl.edu.tw/handle/77174561692531469222

碩士 === 逢甲大學 === 經濟學系 === 90 === Abstract Recently, the issues of sticky price have been discussed in the foreign literature of the macroeconomics field. In order to illustrate sticky price, these authors, called New Keynesians, shown that, in a rational expectation model, an induction of constraint of labor contract has lead wages not to adjust to equilibrium level immediately, which in turn would lead prices to have stagnant adjustment. Besides, New Keynesian sticky-price model has received attention increasingly in monetary policy analysis in more recent year. It could be shown using Taiwan''s annual data for 1982-2001 that the average annual growth rate of money supply (M2) was 15.62%, and the average annual growth rates of real GNP and price were 6.9% and 2%, respectively. In words, with stable money velocity, there existed a large gap around 6.5%, accordance with classical money quantity theory. Wu and Lin (1994) emphasized that exchange rate could reasonably play a key role to block up this big gap. They emphasized that the sharply appreciation in exchange rate was the reason why the high growth rates of money supply during the 1980s in Taiwan did not cause high inflation rates. From a different point of view, the fact that highly money supply growth rates and lowly inflation rates revealed by Taiwan''s data can also be illustrate by a postulate that price may never perfectly flexible in Taiwan. Therefore, from a viewpoint of macroeconomics, the method, a variation of AD-AS model, developed by Dutkowsky (1996), is employed in this thesis to derive a testable econometric model, which the hypothesis of perfectly flexible price can be examined. Using this empirical model, Taiwan''s macro data are, in turn, adopted to test the hypothesis of stick price. Generally speaking, price level may follow three ways to adjust－perfect flexibility, stagnancy (stickiness) and perfect rigidity. The empirical results in this thesis show that price level may not be perfectly flexible in Taiwan. In addition, the general price level, shown from Taiwan''s macro time series data, appears stable growth over time. Combining empirical results and actuality phenomenon above can lead us to conclude that the adjustment of general price level in Taiwan may be approximately stagnant, which supports new Keynesians viewpoint of sticky price.