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Impacts of Financial Factors on Thailand's Business Cycle Fluctuations

  • Surach Tanboon

    (Bank of Thailand)

  • Suchot Piamchol

    (Bank of Thailand)

  • Tanawat Ruenbanterng

    (Bank of Thailand)

  • Paiboon Pongpaichet

    (Bank of Thailand)

Registered author(s):

    This paper illustrates that ?nancial conditions are not simply a re?ection of macroeconomic developments. In fact, one feeds the other, and both are mutually dependent. Adverse ?nancial conditions have the potential to exacerbate negative disturbances on the real economy| converting the initial e?ects of small and short-lived shocks into large and persistent impacts| and consequently generate a downward spiral in which such adverse ?nancial conditions and the deterioration in the macroeconomy feed into each other. A key factor causing the ampli?cation mechanism is the negative relationship between the external ?nance premium and the quality of borrowers' balance sheets|the latter is summarized by how much the balance sheet is saddled with debt relative to internal funds. Empirical evidence points to the existence in the Thai economy of this negative relation. Incorporating this feature in a well-articulated model for Thailand that emphasizes the crucial role of the balance sheets of ?rms and banks in a small open economy allows us to assess the degree of feedbacks between ?nancial and real variables. The key parameter a?ecting the intensity of the feedback e?ects is the elasticity of the external ?nance premium to borrowers' ?nancial health that could temporarily increase during crises. We urge policymakers to look forward and be ready to forestall such a likely feedback loop, and, if it sets o?, must react with su?cient vigor in a timely manner to arrest this corrosive self-reinforcing mechanism.

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    Paper provided by Economic Research Department, Bank of Thailand in its series Working Papers with number 2009-01.

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    Length: 52 pages
    Date of creation: Jan 2009
    Date of revision:
    Handle: RePEc:bth:wpaper:2009-01
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