In a speech delivered on November 19, an official of the US Federal Reserve Board used a chart to compare the percent change in real effective exchange rate index (REER) and the change in international reserves as a percent of GDP for a number of emerging market economies. The estimates relating to Taiwan as shown in Figure 8 that accompanied the speech are misleading. This press statement has been issued to provide greater clarity.

I. Concerning the REER:
1. The REER does not reflect a country's equilibrium exchange rate.

2. The value of the REER is directly influenced by the currency baskets included in the calculation, the weight given to each currency, the choice of the price index, and the selection of the base-period for the REER.

3. How much the REER changes over time depends on which period is chosen, and the economy in the base period selected may not be in an equilibrium state.

4. Estimates provided by the Fed show the NT dollar REER declined by 2.8% during the 12-month period leading up to September 2010. Based on CBC's own assessment, the NT dollar REER dropped by just 0.2% in this period, mainly attributable to the relatively stable prices in Taiwan. Looking at a different time span, the NT dollar REER actually increased by 4.4% between January 2009 and November 18, 2010.

5. The Fed's own data shows the US dollar REER fell by 2.4% between September 2009 and September 2010. As an alternative indicator, the DXY (USD) index was 88.405 on June 17, 2010, and slid to 78.585 on November 18, 2010.

6. During the first ten months of this year, Taiwan's imported price index rose by 12.51% on an annual basis in US dollar terms and by 7.87% in local currency terms. The 4.64% gap reflects the appreciation of the NT dollar against the currencies of Taiwan's major trading partners.

7. Therefore, when using different data sets and selection of base-period for the REER calculation in Figure 8 of the aforementioned speech, the relative location of economies would shift markedly along the vertical axis. In fact, the inflation rates of the economies shown in the upper area of Figure 8 are generally higher than others.

II. The change in international reserves as a percent of GDP is not a good indication of whether a country has intervened in the foreign exchange market.

1. The change in international reserves as a percent of GDP is influenced by the following factors:
(1) The starting level of the reserves;
(2) The currency mix of the reserves and exchange rate movements;
(3) The rate of investment returns;
(4) The size of GDP.

2. A better clue to whether a country has intervened in the foreign exchange market can be found by looking at the growth rate of foreign exchange reserves. Taiwan's FX reserves grew by only 0.8% month-on-month in October 2010, and by a somewhat higher rate of 2.27% in September 2010. These changes can be mainly explained by the appreciation of the euro and other reserve currencies against the US dollar. The data show that Taiwan did not intervene in the foreign exchange market to prevent appreciation of the NT dollar.

The table below outlines foreign exchange reserves holdings of a group of comparable countries.

 3. If the horizontal axis in Figure 8 represented the percent change in foreign exchange reserves, instead of the change in international reserves as a percent of GDP, then Taiwan would move closer to the left, while some of the other economies would be further off to the right of the graph. The red line with negative slope in Figure 8 would then nearly level out, indicating no relationship between percent change in foreign exchange reserves (the horizontal axis) and percent change in the REER (the vertical axis).

The US Department of the Treasury also used the percent increase in foreign exchange reserves to assess the adequacy of reserves holdings of selected economies in its December 2006 report[1].