Inflation Targeting Framework

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Inflation Targeting Framework

• The new Monetary Policy in Thailand

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Inflation Targeting Framework The new Monetary
Policy in Thailand

• Overview of Monetary Policy

• Inflation Targeting Framework in Thailand

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Definition and role of Monetary Policy to the
economy
Real output (GNP)
Employ-ment
Pricestability
Net export
Source Adapted from Paul Samuelson William D.
Nordhaus, Economics, Sixteenth Edition, 1996
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Definition and role of Monetary Policy to the
economy
Real output (GNP)
Employ-ment
Pricestability
Net export
Source Adapted from Paul Samuelson William D.
Nordhaus, Economics, Sixteenth Edition, 1996
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Framework for Conduct of Monetary Policy
Official interest rate Reserve requirements Market
operation Direct control
Monetary Instrument
Implementation
Short-term money market rate Bank reserve
Operational Target
Exchange rates Long term interest
rates Money/credit Assets prices
Intermediate Target
Strategy
Ultimate Goal
Price stability Economic Growth
Indicators or information variables
Source Adapted from Bank of Thailand, Document
for Inflation Targeting Seminar, 2000
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Three Types of Monetary Policy Framework
Note Repo Reburchase market rate, O/N
Interbank overnight rate, OMO Open market
operation
Source Adapt from IMF, Transparency and good
practices for monetary policy,1999
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Development of the Monetary Policy in Thailand
May 2000
1942
Inflation targeting regime
Pegged exchange rate regime
July 1997
Monetary targeting regime
Source Adapted from Bank of Thailand, Article on
Thailands Monetary Policy, 2000 http//www.bot.o
r.th/BOTHomepage/BankAtWork/MonetaryFXPolicies/in
dex_eng_i.asp
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Inflation Targeting Framework in Thailand
Monetary Instruments
14 days repurchase rate
Implementation
1) Daily repurchase market operations 2)
Foreign exchange swaps 3) Government securities
Operational Target
Intermediate Target
Core Inflation forecast
Strategy
Ultimate Goal
Price stability Core Inflation
Indicators or information variables
The inflation rate
Source Adapted from Bank of Thailand, Document
for Inflation Targeting Seminar, 2000
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Core Inflation the policy target

• The use of Core Inflation as the Policy target
• Setting the target core inflation at between
  0-3.5 percent
• Use of quarterly average core inflation as the
  target

Source Graph from Bank of Thailands inflation
report, August 2001
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Implementation of Inflation Targeting Framework
Source Adapted from various documents from Bank
of Thailand, 1999- 2001, http//www.bot.or.th
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Effects of Inflation Targeting Policy the
Monetary Transmission Mechanism
Monetary Policy Committee sets policy rate
Interest rate Credit availability Asset
prices Expectation Exchange rate
Inflation and output
Lending rates translate into retail and
commercial borrowing cost
Production reacts to the
Aggregate demand
Financial Sector
Spending changes which affect Aggregate demand
Retail and Production sector (Spending and
Investment leg)
8 quarters
Source Adapted from Bank of Thailand, Article on
Thailands Monetary Policy, 2000
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Monetary Transmission Mechanism
Short run interest rate
Short run interest rate
Long run interest rate
Short run interest rate
Short run interest rate
Credit Availability
14 days repurchase rate
Asset price
Expectation
Exchange Rate