Exploring the Role of Exchange Rate in Inflation Targeting: Evidence from Thailand

Pongsak Luangaram and Nipit Wongpunya

No 179, PIER Discussion Papers from Puey Ungphakorn Institute for Economic Research

Abstract: This paper develops a small-scale, structural general equilibrium model for the Thai economy. Using Bayesian estimation, we evaluate the conduct of monetary policy under inflation targeting regime. Specifically, we focus on three main issues. First, we investigate whether exchange rate movements are incorporated in the monetary policy formulation. Second, we conduct welfare evaluation under alternative monetary policy settings. Third, we explore how the varying degree of openness could affect the transmission mechanism. Using data over the past 20 years, we find that the Bank of Thailand adjusted policy interest rate in response to exchange rate movements and this helped to reduce both output and inflation fluctuations from global shocks and improves welfare. While higher degree of openness is found to flatten the slope of the Phillips curve, it does not necessarily reduce monetary policy effectiveness. This is because openness also affects the policy coefficients in the central bank's endogenous reaction function.

Keywords: Small open economy models; Monetary policy rules; Exchange rates; Bayesian analysis; Thai economy (search for similar items in EconPapers)
JEL-codes: C32 E52 F41 (search for similar items in EconPapers)
Pages: 25 pages
Date: 2022-05
New Economics Papers: this item is included in nep-ban, nep-cba, nep-dge, nep-mac, nep-mon, nep-opm and nep-sea
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