Academia Sinica announced its white paper, “Policy Recommendations for Monetary and Financial Reforms in Taiwan,” today. Its purpose is to provide comprehensive and forward-looking suggestions to revitalize Taiwan’s capital market, enhance Central Bank monetary and exchange rate policy-making, and improve financial supervision and stability mechanism, so as to promote financial development and economic growth.
The white paper proposes three objectives for an “optimal” monetary and financial system and supervision organization. First, to maintain monetary and financial stability, it is essential to have a stable and predictable inflation rate and a competitive, market-determined exchange rate. Second, it is crucial to invest a country’s financial resources prudently and efficiently, but not to invest all financial resources in high-risk, high-return assets, nor in risk-free, low-return assets. Third, it is necessary to develop a sound financial system to augment employment and income and to offer vital financial resources to fuel industrial transformation in Taiwan.
After examining the operation of Taiwan’s Central Bank and Financial Supervisory Commission, the white paper notes that Taiwan’s monetary and financial system has achieved the first objective with regard to the monetary and financial stability, but at the cost of the other two goals. This will cause not only stagnation of financial and economic development, but also destabilizes the monetary and financial system, drawing hot money into Taiwan. The low efficiency in capital utilization also hinders development of the financial industry, further slowing industrial transformation, economic growth, and real wage growth.
The white paper provides comprehensive and forward-looking suggestions to modernize the Central Bank and the Financial Supervisory Commission, and to rebalance the three objectives. This serves to improve Taiwan’s capital market, enhance Central Bank monetary and exchange rate policy, and enrich the forward-looking financial supervision for the Financial Supervisory Commission.
To enhance the independence, transparency, and accountability of the Central Bank, the white paper recommends that Taiwan follows the U.S. Federal Reserve Bank as an example. Based on systematic research on monetary policy, Taiwan’s Central Bank should establish a complete and dynamic analysis framework, and provide forward guidance as a monetary policy tool. Taiwan should also consider aspects of the monetary authority in Singapore. While maintaining currency stability, Taiwan can carefully evaluate whether to invest part of its foreign exchange reserve funds in a sovereign investment fund. With transparency and accountability, this can stimulate industrial development, employment, and wage income.
The Central Bank should also publish data on its foreign exchange interventions, set up a full-time Board of Directors, and evaluate the advantages and disadvantages of digital currencies based on global financial trends.
Moreover, in order to enhance financial supervision and financial stability, authorities for micro-prudential supervision at the individual institute level and macro-prudential supervision at the overall financial stability level should be restructured. Furthermore, a financial stability committee should be established.
Finally, regarding big data, the government should revise personal data laws as soon as possible to establish a complete portable data right. It should also build a data center that integrates cross-industry, cross-sector and transnational manufacturers, agents, and consumers.
Please click here to read the full version of the “Policy Recommendations Paper for Monetary and Financial Reforms in Taiwan.”