Globalization and Monetary Policy Effectiveness

We model relationships within as well as between two economic regions—Thailand and the rest of the world—and quantify changes in the spillover relationship between international forces and key Thai macroeconomic variables after the adoption of inflation targeting (2000-2008). Within the same framework, we measure the effect of an increase in the policy interest rate by the Bank of Thailand on key domestic economic variables over time, allowing for the possibility that global forces may matter more for Thai economic dynamics over the recent years. With some measure of confidence, we find that global macroeconomic and financial influence matters for Thailand’s economic dynamics. Whether global forces have gained in importance is inconclusive for the overall economy, but that influence has intensified for several selected variables. We have also detected and identified statistically significant changes in the relationship between international forces and Thailand’s economic dynamics over the past several years. Statistical evidence shows that recent changes in monetary policy effectiveness are not likely due to direct influence from globalization, but are mostly due to the change in the relationship among domestic variables themselves over time. Mindful that we may not have sufficient data to get a strong statistical conclusion, but monetary policy’s ability to influence overall domestic events seems to have been somewhat diminished, with no evidence that this is due to globalization. The ability of the central bank to ensure long-term price stability, however, seems to have remained largely intact.