Quantitative studies in the monetary history of Taiwan

This dissertation examines monetary history in Taiwan during its colonial period under Japanese rule (1895-1945) and the subsequent hyperinflationary period (1945-1949). It is divided into two parts, corresponding to the two historical periods under analysis. The first part investigates the interactions among money, income, and prices during the colonial period under Japanese rule. Chapter One presents a historical account of the colonial macroeconomy. Chapter Two deals with the role of money in colonial Taiwan. Economists have long been interested in the relationship between monetary arrangements and the general price level. One particular question has been whether, over substantial periods of time, prices are determined by monetary arrangements (the backing theory of money) or instead solely by the quantity of money (the quantity theory of money). The other important question in monetary economics is whether monetary forces are the primary cause of movements in income, or whether movements in money are primarily determined by feedback from the economy to the money supply. The colonial period in Taiwan in the early 20th century provides a good testing ground for the above questions. The empirical results from both cointegration tests and Granger causality tests all serve to substantiate a position closer to the quantity theory than to the backing theory of money. Having confirmed that the quantity theory of money applied to the case of colonial Taiwan, in Chapter Three both the conventional and cointegration approaches are used to estimate the money demand function. Subject to a wide range of statistical criteria, the cointegration approach performed better than the conventional approach.; The second part of this study examines the behavior of money and prices during the hyperinflationary period. Chapter Four provides a historical background to the Taiwanese hyperinflation. Chapter Five examines the formation of inflation expectations during the hyperinflation. From an indirect test derived from the present value model of hyperinflation, the data support the adaptive expectations hypothesis and reject all other expectations formations for the Taiwanese hyperinflation. Chapter Six extends the Cagan model by examining how real factors such as the relative price may influence the demand for money. During the hyperinflationary period, the price of investment relative to consumer goods exhibited a sharp increase. This observation suggests a possible interaction between relative price, inflation, and money demand. I find that both anticipated inflation and relative price had significant negative effects on real money balances during the Taiwanese hyperinflation.