Comparison of Important Laws Governing the Macroeconomies of Taiwan and China

• Date: 01 August 2018
• Author: Shou‐Yung Yin,Gregory C. Chow
• DOI: http://doi.org/10.1111/1468-0106.12180
• Published date: 01 August 2018

Pacific Economic Review,••:•• (2016) pp. 1-29

doi: 10.1111/1468-0106.12135

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COMPARISON OF IMPORTANT LAWS GOVERNING THE

MACROECONOMIES OF TAIWAN AND CHINA

GREGORY C. CHOW*Princeton University

SHOU-YUNG YIN Academia Sinica

Abstract. This is a comparative study of the important laws governing the macroeconomies of Taiwan

and China. The laws are concerned with consumption, investment and fiscal and monetary policies of

the government. Following similar studies on China, the present paper focuses on the case of Taiwan.

Using annual data from 1961 to 2014 we find that the consumption function satisfies the permanent

income hypothesis of Friedman and the investment function satisfies the accelerations principle as

in the case of China. Money supply does not affect GDP but government expenditure has a positive

effect on consumption and a negative effect on investment. These results are opposite to those ob-

tained for China. Explanations of the differences are given.

1. INTRODUCTION

This paper studies the macroeconomic behaviour of the Taiwanese economy, in-

cluding the consumption, investment and fiscal and monetary policies of the

government. It is a comparative study similar to Chow (2016), which covered

China. The first model is a multiplier–accelerator model consisting of a con-

sumption function and an investment function for explanation of GDP. The sec-

ond model includes government expenditure and money supply as two

additional variables. These two variables are treated first as exogenous variables

and then as endogenous variables. Their effects on, and their interactions with,

the remaining variables are investigated (see Table 1).

A comparison of the macroeconomic behaviour of the economies of Taiwan

and China is of interest because these economies have different institutional

characteristics, including the forms of government and the degrees of openness,

which may affect their macroeconomic behaviour. We also examine the

macroeconomic behaviour of the Taiwanese economy before and after the

introduction of democracy because since democracy was introduced economic

policy-making of the government has become less effective; there is interference

by Taiwan’s congress in economic decision-making and there are frequent

changes in the ministers in charge of economic affairs, who are no longer

professional public servants.

The main objective of the present study is to compare important macroeconomic

rules and regulations in Taiwan with those in the Chinese economy. Readers can

assume certain behaviour on the part of a given set of economic agents and apply

the method of dynamic optimization to derive macroeconomic relations which

*Address for correspondence: Princeton University, Princeton, NJ 08540, USA. E-mail:

gchow@princeton.edu. The authors would like to thank two anonymous referees for their helpful

comments. The first author wishes to acknowledge financial support from the Gregory C Chow

Econometric Research Program for the preparation of this paper.

Pacific Economic Review,••:•• (2016)

doi: 10.1111/1468-0106.12180

© 2016 John Wiley & Sons Australia, Ltd

© 2016 John Wiley & Sons Australia, Ltd

Pacific Economic Review

, 23: 3 (2018) pp. 453–463

doi:10.1111/1468-0106.12180