(Bloomberg) -- Taiwan’s top government-funded research institute has called on the central bank to overhaul some of its long-held approaches to foreign exchange and monetary policy as part of a landmark set of recommendations.
The government should draw lessons from the US Federal Reserve system to improve the independence and transparency of the central bank, according to a white paper released by Academia Sinica on Monday. The report marks the first time the influential institute has weighed in so publicly on central bank reform.
“The government should rethink the status of the central bank and stop treating it like a state-run enterprise,” said Li Yi-ting, an academician at Academia Sinica and a member of the central bank’s policy board, at a briefing in Taipei. “This will reduce the pressure on it to supplement the national treasury from its operation earnings. It will take collaboration on fiscal, governmental and legislative levels to increase the central bank’s independence.”
The monetary authority should also establish a more rigorous analytical framework to improve its decision-making process for foreign exchange and monetary policy, according to the white paper. It added that while the bank’s policies, such as maintaining low interest rates and a weakened Taiwan dollar, have achieved their goals of maintaining stability, those strategies have also led to several unintended consequences -- including poor returns on capital, weak economic growth and lower wages.
Another recommendation was to study the feasibility of establishing a sovereign wealth fund to improve yields on Taiwan’s foreign reserves.
Academia Sinica’s recommendations are not mandatory for the central bank to follow, but they do carry weight given the institution’s importance. It falls under the direct authority of Taiwan’s Presidential Office, and developing policy recommendations is one of its key tasks.
The central bank pushed back against some of the white paper’s key claims in a statement Monday evening. The bank does not keep interest rates low and the currency weak in order to meet its fiscal goals of contributing to the treasury, the bank said in the statement, though it added it would continue to review the adequacy of its monetary policy framework.
On the topic of a sovereign wealth fund, the bank said it welcomed the establishment of one, but that the source of its funding should come from the government budget or bond sales, not from foreign reserves.
The proposals unveiled Monday follow a closed-door forum in early July. Several high-level central bank officials spoke at the forum about monetary policy, including Federal Reserve Bank of St. Louis President James Bullard -- who appeared remotely -- and Taiwan central bank Deputy Governor Chen Nan-kuang.
Founded in Guangzhou in 1924, the Central Bank of the Republic of China (Taiwan), as it’s officially known, was relocated to Taipei along with the rest of the retreating Nationalist government during the Chinese Civil War with the Communists. Since 1979, it has operated in line with an act that mandated the bank prioritize financial and price stability in line with government goals at the time, with broader economic growth further down the list of priorities.
There has been recent criticism, however, of some of the bank’s policies. In a book published last year, for example, several current and past members of the bank’s policymaking board said maintaining a weakened currency -- while beneficial to Taiwan’s export sector -- was having a negative effect on the economy.
The last serious attempt to reform the central bank came in 2002, when the Cabinet proposed changes to the central bank act but the revisions were eventually dropped.
The central bank has slowly embraced some international practices. Five years ago, it started releasing minutes from its board meetings. Since Yang Chin-long became governor in 2018, it has expanded its presence on social media and started livestreaming briefings following rate decisions. This year it began providing foreign exchange data in line with the International Monetary Fund’s standards.
(Updated with additional details in fifth, seventh and eighth paragraphs.)
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