Researcher ORCID Identifier

0009-0002-9323-3921

Graduation Year

2026

Date of Submission

4-2026

Document Type

Open Access Senior Thesis

Degree Name

Bachelor of Arts

Department

Economics

Reader 1

Richard Burdekin

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Terms of Use for work posted in Scholarship@Claremont.

Rights Information

© 2026 Yu-Chi Cheng

Abstract

This study examines how price-based and quantity-based monetary frameworks explain the policy actions of the Central Bank of the Republic of China (Taiwan) within the context of a trade-dependent, small open economy. Utilizing a comparative empirical analysis of Taylor and McCallum rules from 2000 to 2025, the research finds that Taylor rule’s superior fit is contingent upon the inclusion of the augmented variables, such as federal funds rate, Financial Stress Index, and sovereign credit premiums, revealing a policy stance that is deeply reactive to international financial conditions. In contrast, the McCallum rule demonstrates remarkable parsimony, explaining 45% of the variance in the monetary aggregate through domestic shifts in nominal GDP and velocity. The analysis further identifies a persistent policy friction caused by Taiwan’s idiosyncratic vulnerabilities, where trade-driven shocks, housing market stability, and energy-driven inflation exert significant pressure on both rules. These findings highlight a need for a composite policy rule that formally integrates price signals with quantity discipline, supported by augmented global and local indicators, providing a more holistic framework for navigating Taiwan’s unique structural challenges in a volatile global era.

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