This paper examines the relationship between the dollar exchange rate and macroeconomic fundamentals in Taiwan. In the paper, the variables of macroeconomic fundamentals are domestic and foreign money supply, the index of industrial production of domestic and foreign, domestic and foreign interest rate differential. Applying Johansen's cointegration analysis to monthly data for the 2000:01–2015:12 period, we find that: (1) the existence of long-run equilibrium relationships among the exchange rate and the variables of macroeconomic fundamentals. (2) The domestic currency will depreciate when domestic money supply increases or foreign money supply decrease; expansion of the domestic economy or foreign economic contraction, induces an appreciation of the domestic currency; the difference between domestic and foreign interest rates increase, the exchange rate will rise. (3) Error correction coefficient is negative, the implied exchange rate exchange rate adjustment system is stable in Taiwan.
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