Conclusions
The growing ties between mainland China and Taiwan are seen to be reflected in a substantial degree of macroeconomic interdependence between the two neighboring economies. These co-movements are quite in keeping with the strong trade linkages and flows of FDI from Taiwan to mainland China.
Although Taiwan macroeconomic variables are generally more sensitive to cross-strait effects than mainland China’s, significant bidirectional causality suggests a meaningful sensitivity to such effects on the mainland China side as well. Industrial production and money supply growth in the two economies seem to be particularly closely linked, and the results also suggest international transmission of money supply growth across the Taiwan Strait. Although this cannot be proven to represent deliberate policy responses, the monetary sensitivity identified for M2 captures reactions in the target variable pursued by both central banks over our sample period. The interpretation of any such reactions remains complicated, however, as they would necessarily combine direct responses to movements in the other economy with indirect reactions-whereby fluctuations abroad induce movements in domestic variables that the central bank is seeking to stabilize.
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