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The Future of Monetary Policy: Roles of Financial Stability and Exchange Rate

Author

Listed:
  • Surachit Laksanasut

    (Bank of Thailand)

  • Pisit Pualpant

    (Financail Policy Office)

  • Jaruphan Vanichtanunkool

    (Bank of Thailand)

  • Khatharit Sithikul

    (Bank of Thailand)

  • Utumporn Jitsutthiphakorn

    (Bank of Thailand)

  • Jongkol Khamlai

    (Financail Policy Office)

Abstract

The impending change in the global economic and nancial landscape will have important implications for the making of monetary policy in Thailand. This paper highlights two key challenges and proposes steps that can help strengthen the existing in ation targeting (IT) framework. First, we anticipate a more powerful procyclicality mechanism, which will pose greater risk to nancial stability. A theoretical model is constructed to illustrate how such mechanism, in addition to propagating shocks, can generate bubble-and-crash phenomena. In this context, we argue that there are strong justi cations for augmenting the IT framework by rule-based macroprudential policy. Secondly, we study the role of exchange rate exibility in determining long-run sustainable growth. Through crosscountry panel regressions, we nd evidence that conditional on some criteria being met, greater exchange rate exibility is conducive to higher economic growth. We argue that Thailand is well-positioned to bene t from more exibility going forward, which in turn will help spur private sector's adjustments and ultimately ensure a more resilient Thailand.

Suggested Citation

  • Surachit Laksanasut & Pisit Pualpant & Jaruphan Vanichtanunkool & Khatharit Sithikul & Utumporn Jitsutthiphakorn & Jongkol Khamlai, 2010. "The Future of Monetary Policy: Roles of Financial Stability and Exchange Rate," Working Papers 2010-08, Monetary Policy Group, Bank of Thailand.
  • Handle: RePEc:bth:wpaper:2010-08
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    Keywords

    monetary policy; financial stability; macroprudential; exchange rate flexibility; exchange rate and growth;

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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