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Shock Therapy! What Role for Thai Monetary Policy?

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  • Harun Alp
  • Selim Elekdag

Abstract

Thailand had to endure three major shocks during 2008–2011: the global financial crisis, the Japanese earthquake, and the Thai floods of 2011. Over this period, consistent with its inflation targeting framework, the Bank of Thailand (BOT) let the exchange rate depreciate and cut interest rates (to, for example, a historically low level of 1¼ percent by mid-2009). This paper seeks to uncover the role of monetary policy in softening the impact of these shocks. Specifically, it seeks to address the following question: if an inflation targeting framework underpinned by a flexible exchange rate regime had not been in place, how would the economic contractions associated with these shocks have differed? Counterfactual simulations based on an estimated structural model indicate that countercyclical monetary policy and exchange rate flexibility added up to a total of 4 percentage points to real GDP growth during periods when Thailand had to weather these three major shocks.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 12/269.

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Length: 48
Date of creation: 08 Nov 2012
Date of revision:
Handle: RePEc:imf:imfwpa:12/269

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Related research

Keywords: External shocks; Thailand; Monetary policy; Inflation targeting; Flexible exchange rate policy; Monetary transmission mechanism; Economic models; financial accelerator; Bayesian estimation; DSGE model; global financial crisis; Thai floods; emerging markets.; exchange rate regime; exchange rate flexibility; inflation targeting framework; flexible exchange rate regime; fixed exchange rate regime; real exchange rate; inflation rate; nominal exchange rate; exchange rate depreciation; nominal interest rate; real interest rates; inflation rates; aggregate demand; nominal exchange rate depreciation; gdp deflator; monetary economics; exchange rate shock; annual inflation; foreign currency; exchange rate volatility; nominal variables; exchange rate fluctuations; exchange rate movements; change in inflation; exchange rate regimes; financial stability; macroeconomic stability; inflation deviation; price stability; exchange rate policies; real variables; terms of trade;

References

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  1. Mark Gertler & Simon Gilchrist & Fabio M. Natalucci, 2003. "External constraints on monetary policy and the financial accelerator," BIS Working Papers 139, Bank for International Settlements.
  2. Guillermo Calvo & Alejandro Izquierdo & Luis-Fernando Mejía, 2004. "On the empirics of Sudden Stops: the relevance of balance-sheet effects," Proceedings, Federal Reserve Bank of San Francisco, issue Jun.
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  4. Adolfson, Malin & Laséen, Stefan & Lindé, Jesper & Villani, Mattias, 2008. "Evaluating an estimated new Keynesian small open economy model," Journal of Economic Dynamics and Control, Elsevier, vol. 32(8), pages 2690-2721, August.
  5. Reinhart, Carmen & Kaminsky, Graciela & Vegh, Carlos, 2004. "When it rains, it pours: Procyclical capital flows and macroeconomic policies," MPRA Paper 13883, University Library of Munich, Germany.
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  11. Thomas Lubik & Frank Schorfheide, 2003. "Do Central Banks Respond to Exchange Rate Movements? A Structural Investigation," Economics Working Paper Archive 505, The Johns Hopkins University,Department of Economics.
  12. Ian Christensen & Ali Dib, 2008. "The Financial Accelerator in an Estimated New Keynesian Model," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 11(1), pages 155-178, January.
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  15. Javier García-Cicco, 2010. "Estimating Models for Monetary Policy Analysis in Emerging Countries," Working Papers Central Bank of Chile 561, Central Bank of Chile.
  16. Vasco Cúrdia, 2005. "Monetary Policy under Sudden Stops," International Finance 0510025, EconWPA, revised 02 Nov 2005.
  17. Mendoza, Enrique G, 1991. "Real Business Cycles in a Small Open Economy," American Economic Review, American Economic Association, vol. 81(4), pages 797-818, September.
  18. Selim Elekdag & Harun Alp, 2011. "The Role of Monetary Policy in Turkey During the Global Financial Crisis," IMF Working Papers 11/150, International Monetary Fund.
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