Abstract
This study examines the international transmission of the U.S. monetary shocks on the real economy of Taiwan for the flexible exchange rate period. One novel feature of our study is that we not only use the traditional vector autoregression model (VAR) but also the semi-structural VAR model. First, U.S. expansionary monetary policy shocks will worsen U.S. trade balance in the short run while the long run improvement of U.S. trade balance is caused by the lasting improvement in U.S. export. Second, as to the international transmission of U.S. monetary shocks, the U.S. monetary expansion shocks lead to booms in Taiwan. Both trade balance channel and real interest rate channel play important roles in the transmission. Overall, the results from VAR model are similar to that from the semi-structural model. The evidence about the international transmission mechanism appears to be consistent with the prediction of both Mundell-Flemming-Dornbusch (MFD) model and the intertemporal current account model.