Taiwan is today deservedly regarded as a shining model of a country that has been successfully developing itself. One of the principle reasons for its success was the decision made early by government leaders to abandon the Keynesian monetary policy, so prevalent in the early postwar world, of arbitrarily controlling the interest rates charged and offered by banks at an artificially low level, even in the face of inflation, in the mistaken belief that this would facilitate growth and curb the rate of domestic inflation. Another critical reason for Taiwan’s success was the devaluation of an overvalued currency towards its equilibrium exchange rate value, which thus permitted a considerable degree of trade liberalization.
Taiwan’s success has engendered new problems, however. The rapid expansion of foreign trade and the increasing openness of the economy have created a new set of difficulties for the monetary authorities to solve. Some of the most urgent issues are listed below:
(1) Since controlling the rate of increase of the money supply has been acknowledged as the chief instrument of monetary control, it would seem essential to choose a realistic rate of increase that would ensure price stability.
(2)A related question is whether it is necessary to increase the money supply in order for banks to provide adequate credit facilities to industries.
(3)Should the interest rate be fixed arbitrarily by the monetary authorities or determined competitively on the free money market?
