Concluding Comments
The late 1940s episode seems to be a textbook case of the exporting of inflation from the fading Nationalist regime on the mainland to their new power base on Taiwan. This process was facilitated by the August 1948 fixed rate of exchange for the new gold yuan against the Taiwanese taipi that left the taipi dramatically undervalued.[103] The endogeneity of Taiwan’s money supply at the time naturally represents an extreme case where the domestic monetary authority loses all control over the rate of credit creation.
Extraordinarily rapid rates of monetary expansion in mainland China coupled with the fixed exchange rate regime forced on Taiwan produced this outcome. Much lesser external pressure on mainland China today, as well as additional policy options for combatting inflationary pressures through such measures as bond sales and interest rate hikes, ensures that the scale of the danger faced by China today is obviously in no way comparable to Taiwan in the late 1940s. The basic mechanism laid bare in the earlier historical case does remain quite relevant, however, as reflected in the challenges faced by Chinese authorities’ in offsetting the effects of the post-2000 rise in reserve inflows.Appendix Table A6.1. Stationarity TestResults
| Variables | Phillips-Perron Statistics | Ljung-Box Q Statistics | ||
| Lag Order 1 | Lag Order 2 | Lag Order 3 | Up to Lag Order 12 | |
| Taiwanese Inflation | -3.47** | -3.36** | -3.39** | 5.70** |
| -4.33*** | -434*** | -442*** | 5.33** | |
| Taiwanese Money Growth | -4.46*** | -444*** | -445*** | 2.57*** |
| Chinese Money Growth | 3.34 | 4.02 | 5.09 | 0.63*** |
| Capital Inflow | -5.23*** | -5.23*** | -5.25*** | 2.21*** |
Notes: *** and ** denote that the null hypothesis of a unit root is rejected at the 99% and 95% levels, respectively, and the Ljung-Box Q statistics also reject non-stationarity at each individual lag order from 1 through 12.