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Date: Spring 2021
From: Journal of Developing Areas(Vol. 55, Issue 2)
Publisher: Tennessee State University
Document Type: Article
Length: 5,514 words
Lexile Measure: 1650L

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Abstract :

The transmission mechanisms of monetary policy through the exchange-rate channel become operative when any change in the policy interest rate under inflation targeting leads to a change in the real interest rate. This change in the real interest rate, in turn, changes the real exchange rate, which affects the trade and capital flows and hence real output. Although such a linkage between the interest rate and trade-capital flows is well-developed in advanced economies, it remains debatable whether the suggested monetary policy transmissions mechanism involving the interest and exchange rates operates in emerging market economies, such as Thailand. This paper uses quarterly data for Thailand over the period 2000Q2-2017Q4 to investigate the extent to which the interest rate is effective in affecting the real exchange rate and trade flows under the present inflation targeting strategy of monetary policy in this country. The paper specifies and estimates a structural vector autoregression (SVAR) model with six endogenous variables, namely real output, prices, interest rate, real exchange rate, real exports and real imports, in the presence of two external variables, namely the world oil price and the US federal funds rate. The empirical results suggest that the change in the policy interest rate that the central bank of Thailand (Bank of Thailand) deploys as the instrument of monetary policy for price stability under flexible inflation targeting does not make significant contributions to the forecast error-variances of other endogenous variables in the system. These findings raise doubt about the effectiveness of the interest rate in influencing the real exchange rate and through it, trade flows, real output and the prices. However, as suggested in the extant literature on open-economy macroeconomics, both real output growth and inflation maintain feedback relations with changes in the real exchange rate, real exports and real imports. JEL classifications: C32, C51, E52 Keywords: Interest rates, real exchange rate, trade flows, SVAR model, Thailand Corresponding Author's Email Address:

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Gale Document Number: GALE|A641753913