Inflation Dynamics and Implications on Monetary Policy

Vararat Khemangkorn, Roong Poshyananda Mallikamas and Pranee Sutthasri
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Vararat Khemangkorn: Bank of Thailand
Roong Poshyananda Mallikamas: Bank of Thailand
Pranee Sutthasri: Bank of Thailand

No 2008-02, Working Papers from Monetary Policy Group, Bank of Thailand

Abstract: This paper attempts to provide some facts about the current environment where inflation seems to be originating from supply-side factors. It aims in particular to answer whether or not there is a role for monetary policy to contain such inflation and, if yes, how. From this study, it is found that in the past Thailand’s inflation dynamics were largely governed by temporary supply disruptions whose effects on inflation tended to quickly disappear on their own, unless assisted by some other factors such as accommodative monetary policy. During the past five years, however, the nature of these supply shocks has changed in line with the structural shifts in the demand and supply of oil and farm products. As a result, changes in oil and farm prices have themselves become more protracted. Under the circumstance, accommodative monetary policy could keep the impact of supply shocks on inflation even more lasting, and thus the inflation process could become more persistent as well. Therefore, the authorities must maintain high priority on monetary policy discipline and be mindful that persistently high inflation expectations could cause people to become inflation tolerant and ultimately allow inflation to stay high over an extended horizon.

Pages: 71 pages
Date: 2008-02
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Citations: View citations in EconPapers (10)

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