Macroeconomic Interdependence Between Mainland China and Taiwan: A Cross-Strait Perspective on Globalization

Abstract

Macroeconomic interdependence between China and Taiwan is assessed in terms of an array of output, price, money, and stock price measures for each economy. Sizeable simple correlations between these variables are accompanied by significant bidirectional Granger causality in many cases. Further evidence of interdependence arises from impulse response and variance decomposition analysis. As expected, the effects of mainland China variables on Taiwan appear to be stronger than the reverse. The indicated responses of the Taiwanese M2 money supply to developments in China are particularly noteworthy as M2 was generally the central bank target variable over the sample period.