How Does the Policy Rate Respond to Output and Prices in Thailand?

This paper empirically investigates how the policy rate as a monetary policy stance reacts to output and price level in Thailand during 2005 and 2016. An empirical relationship that characterizes the way the Bank of Thailand adjusts its policy rate to output growth and inflation is identified. The results from Johansen cointegration test show that there exists a long-run relationship of the policy rate with real GDP and prices. This long-run equation differs from the empirical Taylor-type rule. However, the result from short-run dynamics captures the short-run interest rate equation. The partial adjustment coefficient in the estimated interest rate equation is negative and highly significant, which indicates that any deviation of the policy rate from its equilibrium value is corrected by monetary policy actions. Furthermore, there is long-run causality running from inflation and economic growth to a change in the policy rate. In the short run, economic growth does not negatively cause a change in the policy rate while inflation positively causes a change in the policy rate. Also, impulse response analysis from an unrestricted VAR model indicates that a shock to inflation has a stronger impact on the fluctuations in the policy rate a shock to output growth does.