Monetary growth targeting, the Taylor Rule and share-market stability

This paper applies counterfactual simulation experiments based on Bayesian estimationof an open-economy dynamic stochastic general equilibrium model of Taiwan.We assess the monetary targeting framework of the Central Bank of the Republic ofChina relative to a Korea-style inflation targeting Taylor rule and a Singapore-styleexchange-rate targeting framework. We find that welfare changes may be positiveor negative, but very small, at most less than 0.6 percent of consumption. However,switching to a Taylor rule or exchange-rate based regime leads to significantly greatervolatility in Tobin's Q. Given the importance of share-price stability for overall financialmarket performance, monetary growth targeting emerges as the more prudentialframework for monetary policy.
JEL Classification: E52, E62,F41