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Keep NT dollar stable: US economist

Taiwan should keep its currency stable against its US counterpart in order to prevent capital outflows, while the US subprime mortgage problem and its impacts on world financial markets may have been exaggerated, a Nobel laureate said over the weekend.

The central bank should not allow the Taiwanese currency to sharply appreciate or depreciate, which would cause capital outflows to either the US or to China, Robert Mundell told reporters during his visit to Taipei last week.

The outflow of capital would have an adverse impact on Taiwan, Mundell said.

Mundell is a Columbia University economics professor who won the Nobel Prize in economics in 1999.

Mundell, credited as the intellectual father of the euro for his research on currency zones, said he suggested in 2005 that the central bank work to steady the movement of the NT dollar.

On Thursday, the central bank raised its key interest rate 0.125 percentage points, in contrast to the US Federal Reserve's cutting its benchmark rate by 50 basis points earlier in the week.

In a press conference held after the central bank's quarterly board meeting on Thursday, bank Governor Perng Fai-nan (彭淮南) said the rate hike was made to address the potential risk of inflation and capital outflows.

Perng declined to comment on whether the move was aimed at boosting the relatively weak NT dollar, but stressed that the movement of local currency should be decided by market forces.

Even so, the central bank reportedly intervened in the currency market on Friday to support the exchange value of the NT dollar, pushing the local currency to close NT$0.113 higher at NT$32.953 versus the US greenback, breaching the long-term psychological barrier of NT$33.0.

On Friday, the euro rose to a record of 1.4 euros to US$1, the highest since the European currency was introduced in 1999.

Mundell said the strong euro might hurt economic growth in the euro zone if it led to deflation, as consumers would be deterred from purchasing because of rising prices.

The strength of the euro could also result in a negative impact on stock markets, as was seen when Japan's strong yen depressed the Tokyo market in the 1990s.

On Tuesday, Mundell told a press conference in Hong Kong that China should keep the yuan steady and peg its currency at 7.5 yuan to US$1 if Beijing wanted to bring its balance of payments into equilibrium and rein in inflation.

The yuan has risen 10 percent against the US dollar since China scrapped a decade-old peg to the US currency and started managing it against a basket of currencies in July 2005.

In a speech delivered in Taipei on Saturday, Mundell extended his fixed exchange rate idea by saying that Asia should establish a fixed-exchange rate zone and even a common currency as a way to push for economic convergence.

Mundell made the trip to Taiwan after being invited by the Chinese-language Commonwealth magazine to attend an economic forum.

Commenting on the recent US subprime mortgage problem, Mundell held an optimistic view and said the US would eventually recover from the problem.

Mundell said the US housing loan problem was not a credit crisis, but a problem of liquidity, adding that flexibility in the US economy and fast growth in emerging markets would help put the world economy back on track.

He stressed that the subprime problem should not be blamed for the slowdown in the US economy, as signs of weakening growth had begun six months ago.
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