Based on the characteristic properties of the small open economy, this paper studies the effects of government expenditures, money supply, the exchange rate and import prices on Taiwan’s exports and export prices. A system of simultancous equations of the demand for export and export price are specified and estimated. Our empirical results show that the export price has a significant effect on Taiwan’s exports. Changed export prices reflected mostly increases in import costs. In addition, due to rapid growth in the money supply and in government expenditures over the past few years, the excess demand in the goods and services market has led to a further increase in export price levels. If government authorities can refrain from this type of excessive expansion in the money supply and government expenditure, factors exerting a negative influence on Taiwan’s exports will be solely restricted to imported inflation.
