Interactions between Asset Prices and Monetary Policy in Taiwan: A Structural VAR Model

Abstract

Aims: This paper analyzes the role of house prices in monetary policy transmission mechanisms in Taiwan using structural VAR (SVAR). The discussion of the role of asset prices in the monetary policy transmission mechanism can help us determine the effectiveness of monetary policy. Results: The contemporaneous effect of contractionary monetary policy on house prices exhibits a significant and positive relationship, and the response gradually approaches zero. The contemporaneous effect of contractionary monetary policy on stock prices is negative and statistically insignificant. The empirical results of this study may not support the transmission role of house and stock prices due to the low interest rate and the possibility of non-banking system channels of investment and consumption capital sources. Shocks to house and stock prices have no simultaneous impact on monetary policy; the impact gradually appears in the third or fourth quarter after such shocks. Conclusion: The result suggests that the asset market plays a prominent role in the Taiwan monetary policy setting, though the immediate response is small.