Exploring the Impact of Openness on Inflation in Taiwan: Mediation Analysis With A Quantile Approach

Abstract

This paper adopts an innovative method, which is totally different from the past research studies, combining mediation analysis and a quantile regression to examine the impact of openness on inflation whether through money supply or not from 1961 to 2019 in Taiwan. The result of the traditional ordinary least square approach shows that Taiwan’s trade openness affects inflation through the full mediation effect of money supply for the period of 1961-2019 and there is no direct relation between trade openness and inflation. However, the results of this innovative approach indicate that Taiwan’s trade openness affects inflation through the partial mediation effect of money supply at 0.3 and 0.5 distributions of inflation. This result indicates that trade openness not only does directly affect inflation, but also indirectly affects inflation through the money supply