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The Future of Monetary Policy: Roles of Financial Stability and Exchange Rate

Nasha Ananchotikul, Nuwat Nookhwun, Paiboon Pongpaichet, Songklod Rastapana and Phurichai Rungcharoenkitkul
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Paiboon Pongpaichet: Bank of Thailand
Songklod Rastapana: Bank of Thailand

No 2010-07, Working Papers from Monetary Policy Group, Bank of Thailand

Abstract: The impending change in the global economic and nancial landscape will have important implications for the making of monetary policy in Thailand. This paper highlights two key challenges and proposes steps that can help strengthen the existing in ation targeting (IT) framework. First, we anticipate a more powerful procyclicality mechanism, which will pose greater risk to nancial stability. A theoretical model is constructed to illustrate how such mechanism, in addition to propagating shocks, can generate bubble-and-crash phenomena. In this context, we argue that there are strong justi cations for augmenting the IT framework by rule-based macroprudential policy. Secondly, we study the role of exchange rate exibility in determining long-run sustainable growth. Through crosscountry panel regressions, we nd evidence that conditional on some criteria being met, greater exchange rate exibility is conducive to higher economic growth. We argue that Thailand is well-positioned to bene t from more exibility going forward, which in turn will help spur private sector's adjustments and ultimately ensure a more resilient Thailand.

Keywords: monetary policy; financial stability; macroprudential; exchange rate flexibility; exchange rate and growth (search for similar items in EconPapers)
JEL-codes: E44 E50 F31 (search for similar items in EconPapers)
Pages: 71 pages
Date: 2010-07
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