ABSTRACT
Introduction The economic performance of Taiwan since the 1960s is reflected in its high economic growth rate and low inflation. The only exception to the low inflation being a sudden jump in the rate to 20 per cent (in respect of the CPI) 1974 in the wake of the first oil crisis. The attainment simultaneously of the twin objectives of economic policy can be attributed to government economic policies, based on sound industrial strategy,l a tight control of wages, judicious monetary and exchange-rate policies, including only a slow introduction of promised deregulation of the monetary/financial system. These fashioned a healthy external position in respect of the balance of payments and foreign reserves which, however, put upward pressure on the domestic currency. Instead of a once-andfor-all adjustment of the exchange rate, a policy of gradual appreciation generates an expectation that the money supply will grow at an accelerated rate? Thereby, such a policy can spread over into other financial markets and result in an increase in the financial transactions in the stock market (Chiu and Hou, 1992, 1995; Wenninger and Radecki, 1986; Wu and Hwung, 1990).
