Managed floating by stealth: the case of Taiwan

Taiwan is among the world's largest holders of international reserves, having accumulated US $350 billion of foreign exchange as of end 2009. Despite its significance, since it is not a member of the IMF, Taiwan has been relatively under-studied compared to many of its other Asian counterparts. As such, the aim of this paper is to shed a little light on Taiwan's exchange rate policies and strategies. Our results reveal a regime that can be characterized as involving some degree of management of the New Taiwanese dollar (NTD). More significantly, we can confirm the existence of an asymmetry in central bank foreign exchange intervention responses to currency appreciations versus depreciations in Taiwan, particularly in the case of nominal effective exchange rates (NEERs). This in turn rationalizes the relative exchange rate stability as well as the sustained reserve accumulation in Taiwan.