We apply a threshold autoregressive model to a reaction function of the central bank of Taiwan to see if it responds differently to its policy objectives when the severity of inflation differs. We locate three thresholds and thus four inflation regimes. In the regime with essentially no inflation, the central bank responds to both output and inflation. In the low inflation regime, it responds countercyclically to output, but shows no response to inflation. In the moderate and high inflation regimes, it increasingly responds to inflation, but not to output. Our results of an asymmetric policy response are consistent with the central bank's public statements.
