Monetary Policy and Underlying Inflation Pressures: The Essence of Monetary Policy Design

Atchana Waiquamdee, Pranee Sutthasri, Tientip Subhanij and Surach Tanboon
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Atchana Waiquamdee: Bank of Thailand
Pranee Sutthasri: Bank of Thailand
Tientip Subhanij: Bank of Thailand
Surach Tanboon: Bank of Thailand

No 2009-11, Working Papers from Monetary Policy Group, Bank of Thailand

Abstract: This paper offers a justification for and assurance of the efficiency of a monetary policy design that is based on using core inflation as the policy target. Illustrated in a New Keynesian framework where the microeconomic foundation with rigidities of various types is the central feature, the paper starts with an important reminder of the reason why central banks need to focus on inflation as their primary objective. Once the mandate of price stability is established, the next question that follows is: Which measure(s) of inflation, according to theory, is most relevant to the conduct of monetary policy? While the literature broadly suggests that, under certain assumptions, stabilizing a target index that puts more weight on the stickier prices is a better policy, it has mostly come to a conclusion that the monetary authority should be mindful of developments in a broad variety of prices. As a result, while the choice of the policy target in the case of Thailand comes down to core inflation, in its implementation of the inflation targeting framework, the Bank of Thailand also looks at several indicators that help gauge as accurately as possible underlying price pressures.

Pages: 21 pages
Date: 2009-11
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Citations: View citations in EconPapers (2)

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