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Thailand’s Medium-term Macroeconomic Policies: Major Challenges and Appropriate Responses

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Author Info

  • Nasha Ananchotikul

    (Bank of Thailand)

  • Chayawadee Chai-anant

    (Bank of Thailand)

  • Krist Dacharux

    (Bank of Thailand)

  • Manop Udomkerdmongkol

    (Bank of Thailand)

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    Abstract

    This paper aims to identify major medium-term challenges facing the Thai economy as a result of the Sub-prime financial crisis as well as the public policy reactions following the crisis before providing appropriate recommendations. Over the medium term, Thailand’s economic recovery may be subject to its ability to lift the level of potential output that has been lowered during the crisis from subdued investment and confidence; concerns over fiscal sustainability; as well as increased risks to asset prices and inflation, possibly through large capital inflows into the region induced by world excess liquidity. Appropriate fiscal policy calls for the balancing between the short-run growth stimulus and the long-run potential output elevation for a sustainable recovery. Fiscal measures must be carefully designed and budget effectively disbursed. The role of expenditure automatic stabilizer should be enhanced to lend greater flexibility in support of the economy during possible future challenges, while also formulate a clear plan for fiscal consolidation to preserve sustainability. On the other hand, monetary policy likely encounters limitation on continued easing stance due to rising inflationary pressure as economic recovery solidifies. Nonetheless, monetary discipline and price stability will foster as the potential economic growth over the long run. In addition, the role of central bank in preserving financial stability needs to be fortified by macro-prudential measures which are more targeted and flexible in conjunction with the option in interest rate policy, only when there are no conflicts to monetary policy objectives, to contain the financial imbalances as a detrimental risk factor to the overall economic stability.

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    File URL: http://www.bot.or.th/English/EconomicConditions/Semina/Documents/Paper5_sym09.pdf
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    Bibliographic Info

    Paper provided by Economic Research Department, Bank of Thailand in its series Working Papers with number 2009-05.

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    Length: 66 pages
    Date of creation: May 2009
    Date of revision:
    Handle: RePEc:bth:wpaper:2009-05

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    References

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    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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    1. Selma Mahfouz & Richard Hemming & Michael Kell, 2002. "The Effectiveness of Fiscal Policy in Stimulating Economic Activity--A Review of the Literature," IMF Working Papers 02/208, International Monetary Fund.
    2. Yuwawan Rattakul, 2003. "Thailand's recent public debt issues," BIS Papers chapters, in: Bank for International Settlements (ed.), Fiscal issues and central banking in emerging economies, volume 20, pages 234-244 Bank for International Settlements.
    3. Bernanke, Ben & Gertler, Mark, 1989. "Agency Costs, Net Worth, and Business Fluctuations," American Economic Review, American Economic Association, vol. 79(1), pages 14-31, March.
    4. Barry, Frank & Devereux, Michael B., 2003. "Expansionary fiscal contraction: A theoretical exploration," Journal of Macroeconomics, Elsevier, vol. 25(1), pages 1-23, March.
    5. Enrique G. Mendoza & P. Marcelo Oviedo, 2006. "Fiscal Policy and Macroeconomic Uncertainty in Developing Countries: The Tale of the Tormented Insurer," NBER Working Papers 12586, National Bureau of Economic Research, Inc.
    6. Alberto Alesina & Roberto Perotti, 1997. "Fiscal Adjustments in OECD Countries: Composition and Macroeconomic Effects," IMF Staff Papers, Palgrave Macmillan, vol. 44(2), pages 210-248, June.
    7. Ethan Ilzetzki & Carlos A. Vegh, 2008. "Procyclical Fiscal Policy in Developing Countries: Truth or Fiction?," NBER Working Papers 14191, National Bureau of Economic Research, Inc.
    8. Ben S. Bernanke & Mark Gertler, 2001. "Should Central Banks Respond to Movements in Asset Prices?," American Economic Review, American Economic Association, vol. 91(2), pages 253-257, May.
    9. Erlend Nier, 2009. "Financial Stability Frameworks and the Role of Central Banks: Lessons from the Crisis," IMF Working Papers 09/70, International Monetary Fund.
    10. Talvi, Ernesto & Vegh, Carlos A., 2005. "Tax base variability and procyclical fiscal policy in developing countries," Journal of Development Economics, Elsevier, vol. 78(1), pages 156-190, October.
    11. Chayawadee Chai-Anant & Corinna Ho, 2008. "Understanding Asian equity flows, market returns and exchange rates," BIS Working Papers 245, Bank for International Settlements.
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