Structural VAR analysis of monetary transmission mechanism and central bank’s response to equity volatility shock in Taiwan

Lo, Chi-Sheng (2016): Structural VAR analysis of monetary transmission mechanism and central bank’s response to equity volatility shock in Taiwan.

Abstract

This research applies recursive Structural Vector Auto Regression (SVAR) model with short-run restriction into two kinds of shocks: monetary and volatility. The first SVAR estimates the shock of contractionary monetary policy on Taiwan’s key monthly macroeconomic variables including exports, CPI, exchange rate, money supply, and Taiwan Weighted Stock Exchange (TWSE) Index. The second SVAR estimates the shock of Generalized Autoregressive Conditional Heteroskedasticity (GARCH) volatility of TWSE on Taiwan’s daily exchange rate, overnight interbank loan rate, and Taiwan Government Bond Index (TGBI). The first SVAR model shows prize puzzle has been evident in Taiwan. The second SVAR model found flight to safety into bond market after the volatility shock in equity market. Combining the results of both models and based on other literature reviews, we can also conclude that effectiveness of monetary policy exhibits quite significant non-linearity in Taiwan.

• Item Type: MPRA Paper
• Language: English
• Keywords: Vector Auto Regression, Monetary Policy Shock, Volatility Shock, Flight to Safety, Taiwan
• Subjects: C - Mathematical and Quantitative Methods > C5 - Econometric Modeling > C58 - Financial Econometrics; E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E50 - General; G - Financial Economics > G1 - General Financial Markets

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