On a comprehensive case for Managed Floating in Thailand: How much “managed” and how much “floating”?

Ashvin Ahuja
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Ashvin Ahuja: Bank of Thailand

No 2004-07, Working Papers from Monetary Policy Group, Bank of Thailand

Abstract: This paper searches for an appropriate exchange rate regime and provide a broad guideline for exchange rate management for Thailand in the medium term. An appropriate exchange rate regime is defined to be a credible regime that is most desirable. Our findings are in agreement with the flexible exchange rate view, but not freely floating. Flexible exchange rate is associated with higher long-term growth and lower inflation on average. We find that a Fix- Flex hybrid is desirable for Thailand from the point of view of shock absorbance. The vital consideration for credibility in the medium run decides in favor of leaving much of the decisions to the market, that is more Flex than Fix. Specifically, we advocate a Fix-Flex hybrid along the line of the Adjustable Basket and Band (ABB) plus inflation targeting. This type of managed float entails a trade-based basket design that allows the nominal effective exchange rate (NEER) to float within a relatively wide and adjustable band that incorporates an allowance for productivity improvement and inflation differential over time, all unannounced, combined with inflation targeting as anchor for nominal expectations.

Pages: 41 pages
Date: 2004-09
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