Monetary Policy and Inflation in Thailand

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Monetary policy and inflation in Thailand

Virinrat Sitithanasart 5445902329

Presented to
Mr. Chawaruth Musigchai

In fulfillment for the course 2952341
Course: Economics of money and financial markets
Bachelor of Art in Economics (EBA) of Chulalongkorn University, Bangkok, Thailand.

Background on monetary policy in Thailand
Monetary Policy Transmission Mechanism
I investment , Consumption
Domestic Monetary policy)
฿ Export , Import
(External Monetary policy)

This picture shows the monetary policy Transmission mechanism within flexible exchange rate regime. To explain about Domestic Monetary Policy and External Monetary Policy, The last target in the economy is output and price. M increase means expansionary monetary policy and M decrease mean tight monetary policy. Expansionary monetary policy aims to increase aggregate demand and economic growth in the economy. It involves cutting interest rates or increasing the money supply to boost economic activity. In Domestic monetary policy, lower interest rates make it cheaper to borrow; this encourages firms to invest and consumers to spend. Moreover, it reduces the cost of mortgage interest repayments. This gives households greater disposable income and encourages spending. Lower interest rates reduce the incentive to save. However, in external monetary policy, using expansionary monetary policy reduce the value of baht according to lower interest rate making exports cheaper and increase export demand. So, the demand of good and service in the overall economy will increase. Excess demand of good and service will adjust price to increase also. Monetary policy framework

The monetary policy framework in Thailand can be divided into three periods as follows. The first monetary policy regime was the pegged exchange rate. This regime had been adopted after the Second World War. However, when a greater degree of international capital flow has been allowed; a monetary policy regime with fixed exchange rate became one factor that led the country to an excessive external borrowing and financial instability afterwards. After letting the baht float on the July 2, 1997; the Bank of Thailand had initially maintained high short-term interest rates as one mechanism that aimed at preventing the baht from substantial depreciation. Simultaneously, the Bank of Thailand started targeting monetary aggregates within a financial programming approach to ensure macroeconomic consistency and to achieve price stability and sustainable economic growth as well. Therefore, daily liquidity management was pursued in order to prevent excessive volatility interest rate and to ensure that there was enough liquidity in the Thai financial system. Later on, when Thailand had exited the IMF program; the Bank of Thailand formally adopted inflation targeting in May 2000. The change in monetary policy framework resulted partly from the fact that the Bank found less stable relationship between money supply and output growth. Moreover, the Bank also reappraised its domestic and external environment and found that monetary targeting would not appropriate for the Thai economy anymore. Under the third regime of monetary framework, an inflation targeting, the Bank implements its monetary policy by influencing short-term money market rates through the selected key policy rate. The Bank of Thailand currently uses the 14-day repurchase rate as its policy rate. The Monetary Policy Committee signals shifts in monetary policy stance through an announcement of change in the key policy rate. The inflation targeting allows Thai monetary policy to be able to cope with shocks in the domestic economy without relying on a relationship between money and inflation. Moreover, as a range of inflation is announced to the public; this target has become one of the means to communicate to the public. The more transparent the communication; the more accountability could be achieved...
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