An Investigation of the Interrelations among Macroeconomic Variables in Thailand under Inflation-Targeting for the Post-Financial Crisis Period

Abstract

Abstract:This paper employs a five-variable monetary policy transmission model within a structural vector error correction (SVEC) modelling framework for Thailand to examine the relative contributions of the policy interest rate and a monetary aggregate of real output and prices. The model is estimated using quarterly data for the 2000Q2–2019Q4 period after imposing both short- and long-term restrictions. The empirical results suggest that the policy interest rate and the monetary aggregate contribute significantly to the forecast-error-variances of real output and prices, irrespective of whether the policy interest rate or the monetary aggregate appears to be the lead variable. That a shock to the money stock contributes to real output and to prices, whether treated as a policy instrument or as an endogenously determined variable within a generalized macroeconomic system, is consistent with the implication of classical monetary theory, which suggests the existence of a long-run equilibrium relation among money, real output, prices, interest rates and exchange rates. The results also support a co-integral relation among the four variables in Thailand. A major policy implication is that an inflation-targeting central bank such as the Bank of Thailand can deploy a monetary aggregate as a monetary policy instrument, particularly in a low inflation environment.