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Monetary Policy Shocks and Macroeconomic Variables: Evidence from Thailand

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Structural Changes and their Econometric Modeling (TES 2019)

Part of the book series: Studies in Computational Intelligence ((SCI,volume 808))

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Abstract

From May, 2000 up to the present day, Thailand has implemented a monetary policy of inflation targeting, with its central bank (Bank of Thailand) using a short-term interest rate as the main monetary instrument. A question arises as to whether the short-term policy interest rate remains effective as the monetary policy instrument due to the current uncertainty of global economy

Using the structural vector error correction (SVEC) model with contemporaneous and long-run restrictions, this paper has employed quarterly data for Thailand over the inflation targeting period of 2000q2–2017q2 to investigate the relationship among monetary policy shocks and some key macroeconomic variables in Thailand under the operation of the inflation targeting. This study finds significant feedback relations among the six variables in the specified SVEC model, namely real output, prices, interest rates, monetary aggregates, exchange rates and trade balance. It also suggests that the effects of monetary policy on macroeconomic variables in Thailand are mostly consistent with theoretical expectations. The overall results provide support to an argument that price stability is required for sustained economic growth. More importantly, the policy interest rate remains valid and effective as the monetary instrument for price stability under inflation targeting

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Notes

  1. 1.

    There is an argument that central banks do not, and cannot, impose control over the long-term interest rate without controlling the money growth rate. The use of a short-term interest rate as the monetary instrument makes the money-growth rate unstable. Unstable money growth makes the inflation and hence the interest rate unstable [2, 13].

  2. 2.

    The variables in an SVEC model represent a multivariate system of endogenous variables, which maintain dynamically feedback relations. For identification purposes, some restrictions are imposed on the long-run and the short-run (or contemporaneous) relations among variables in the SVEC model.

  3. 3.

    Considering only one cointegrating relation. The reason behind this consideration is that we emphasize a monetary policy shock as only one transitory shock. The identification of the long-run restrictions is also based on the assumption of money neutrality that a monetary policy does not permanently affect real variables in the long-run.

  4. 4.

    The zeros are the restricted element and the asterisks are unrestricted elements.

  5. 5.

    In estimation procedure, this study uses the R program by Pfaff [25].

  6. 6.

    Since the trade balance, which is the difference between exports and imports, might be negative values; it could not take the logarithm transformation.

  7. 7.

    The ADF test is based on the null-hypothesis that the series under testing has a unit root. The KPSS test is based on the hypothesis that the series under consideration is stationary and hence does not have a unit root.

  8. 8.

    The improvement of the trade balance is driven by the relatively strong import contraction. The reason behind this is that the contractionary monetary policy shock shrinks the output and, in turn, reduces import demand. This effect is called ’the income absorption effect.

  9. 9.

    The impulse response functions that contradict theory predictions are known as empirical puzzles that are often found in monetary literature. These anomalies may come from modelling issues e.g. identification and data limitations with a short time span.

  10. 10.

    The reason behind this is that an expansionary monetary policy raises domestic income and, in turn, increases import demand, which leads to a deterioration of the trade balance.

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Author information

Authors and Affiliations

  1. School of Management, Mae Fah Luang University, Chiang Rai, Thailand

    Popkarn Arwatchanakarn

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  1. Popkarn Arwatchanakarn
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Correspondence to Popkarn Arwatchanakarn .

Editor information

Editors and Affiliations

  1. Department of Computer Science, University of Texas at El Paso, El Paso, TX, USA

    Vladik Kreinovich

  2. Faculty of Economics, Chiang Mai University, Chiang Mai, Thailand

    Songsak Sriboonchitta

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Arwatchanakarn, P. (2019). Monetary Policy Shocks and Macroeconomic Variables: Evidence from Thailand. In: Kreinovich, V., Sriboonchitta, S. (eds) Structural Changes and their Econometric Modeling. TES 2019. Studies in Computational Intelligence, vol 808. Springer, Cham. https://doi.org/10.1007/978-3-030-04263-9_16

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