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Inflation dynamics and its implications for monetary policy

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Author Info

  • Anotai Buddhari

    (Bank of Thailand)

  • Varapat Chensavasdijai

    (Bank of Thailand)

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    Abstract

    Since May 2000, the Bank of Thailand adopted inflation targeting as its monetary framework, making price stability the overriding policy objective. Understanding the inflation transmission mechanism is therefore crucial in policy assessment and decision-making. Of particular concern are the key determinants of inflation in Thailand and their relative importance over time. Given the pervasive influence of the exchange rate in the economy, the paper employs econometric models to measure the pass-through of exchange rate movements to domestic prices. In doing so, it evaluates whether the degree of pass-through varies across sectors. Reasons that explain the weak exchange rate pass-through include: 1) changes in firms’ pricing strategy, 2) lower inflation expectations, 3) shifts in housing market structure, and 4) prevalence of administered price measures. The low pass-through has provided more room for manoeuvre in monetary policy. As the pass-through depends on not only the share of import content but also the exchange rate volatility, large fluctuations in the exchange rate can still pose a threat to the inflation target.

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    Bibliographic Info

    Paper provided by Economic Research Department, Bank of Thailand in its series Working Papers with number 2003-05.

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    Length: 63 pages
    Date of creation: Aug 2003
    Date of revision:
    Handle: RePEc:bth:wpaper:2003-05

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    Related research

    Keywords: Thailand; Inflation; Monetary policy; Exchange rate pass-through;

    References

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    1. M S Mohanty & Marc Klau, 2001. "What determines inflation in emerging market economies?," BIS Papers chapters, in: Bank for International Settlements (ed.), Modelling aspects of the inflation process and the monetary transmission mechanism in emerging market countries, volume 8, pages 1-38 Bank for International Settlements.
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    Cited by:
    1. Luis Fernando Escobar Patiño & Pablo Mendieta Ossio, 2003. "Inflación y depreciación en una economía dolarizada. El caso de Bolivia," Revista de Análisis del BCB, Banco Central de Bolivia, vol. 6(2-1), pages 7-50, December.

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