1. Monetary Policy and the Transmission Mechanism in Thailand By Piti Disyatat Pinnarat Vongsinsirikul

2. Motivation Understanding transmission mechanism key to successful conduct of monetary policy –Time lag –Channels of transmission Compare with evidence from other countries How has the crisis affected monetary transmission?

3. Presentation Outline The main channels of monetary transmission Interest rate pass-through Response of key macro-variables to monetary shocks Relative importance of each channel Summary and conclusion

4. Central Bank Output and Inflation S-T Interest Rate OMO Monetary Transmission Mechanism Transmission Channels Interest Rate Credit Exchange Rate Asset Price

5. Interest Rate Pass-Through To Retail Rates Methodologies 1.Dynamic Multiplier Model 2.Error Correction Model (ECM)

6. 89M1-95M12 89M1-02M3 0.50.147 0.350.07 PeriodImpact Immediate 89M1-95M12 89M1-02M3 0.057 0. 059 3-Month6-Month 0. 402 0. 317 0. 612 0.399 Long-Run Speed of Adjustment 0.7 0.429 ECM Methodology Multiplier Method Pass Through of RP to 3-Month Deposit Rate

7. 89M1-95M12 89M1-02M3 0.40.101 0.3560.08 PeriodImpact Immediate 89M1-95M12 89M1-02M3 0.089 0.041 3-Month6-Month 9.328 0.239 0. 521 0.356 Long-Run Speed of Adjustment 0.558 0.389 ECM Methodology Multiplier Method Pass Through of RP to Minimum Lending Rate

8. International Comparison of MLR Pass-Through

11. Justification for Interest Rate Stickiness in Thailand High switching cost during economic downturn and fewer alternative sources of funds Credit rationing due to asymmetric information High liquidity Social pressure Posted rate

12. Response to Monetary Shocks Time lags Channels of transmission

13. Methodology Vector Autoregressions (VARs) analysis –Dynamic system of equations –Minimal assumption about structure of economy –Evidence for other countries readily available RP14 indicator of monetary policy Sample: 1993 Q1 to 2001 Q4

14. Basic Model: GDP, CPI, RP14: 2 Lags U-shaped output response, maximum impact after 4-5 quarters

15. Components of Aggregate Demand Private Consumption Investment Export Import

17. Channels of Monetary Transmission Augment basic model with variable that represents each channel Compare output response with and without the relevant channel operating

18. Heavy reliance on bank finance in Thailand Private credit to GDP ratio (average for 1995-2000) Bank Lending Channel

19. Bank Lending Model GDP response larger LOANS fall after 3 quarters PRICE falls after 4 quarters

20. Bank Lending Channel

21. Credit intensity of production has fallen Re-estimate over 1993 Q1 to 1999 Q1: Impact of RP14 on GDP and LOANS larger Impact of LOANS on GDP larger

22. Bank Lending Channel: 1993 Q1-1999 Q1

23. Exchange Rate Channel

24. Asset Price Channel

25. Direct Interest Rate Channel

26. Summary Model

27. Conclusion Stylized Facts (In Response to a Tightening): 1.GDP displays U-shaped response, trough after 4-5 quarters and dissipating after 11 quarters 2.GDP displays U-shaped response, trough after 4-5 quarters and dissipating after 11 quarters 3.Investment most sensitive component of GDP

28. Conclusion (cont.) Transmission primarily through interest rate and bank lending channels Role of banks declined in recent years - Lower interest rate pass-through - Weaker bank lending channel

29. Looking Forward Bank health and corporate balance sheets More sensitivity of retail rates Wider share ownership Greater access to credit: Financial Master Plan Resolution of FIDF problems

30. Implications for Monetary Policy Significant lags involved in monetary transmission These lags change over time Must be forward-looking – Rely on accurate forecasts – Constantly look out for structural changes in the economy