Drivers of Thailand Inflation

Abstract

This study explores the driver of Thailand’s inflation by employing a structural vector autoregression (SVAR) model, where monthly data on global oil prices, unemployment rates, inflation rates, policy interest rates, and exchange rates from 2002M1 to 2023M6 are deployed. The empirical results suggest that Thai inflation is primarily driven by a positive global oil price shock. Additionally, the volatility of Thai inflation is mostly explained by global oil prices, with a partial contribution from the policy rate. However, following an increase in inflation, the Bank of Thailand acts as an inflation fighter by hiking the policy rate, thereby reducing exchange rate depreciation. It is implied that a conventional monetary policy of hiking the policy rate would be optimal to fight against inflation for achieving and maintaining price stability, which is the primary objective of the Bank of Thailand, as well as beneficial for reducing Thai baht depreciation.

Keywords: Inflation, SVAR, Thailand

References

Alesina, A. & Stella, A. (2010). The Politics of Monetary Policy. In Friedman, B. M. & Woodford, M. (Eds), Handbook of Monetary Economics, (pp. 1001-1054). Amsterdam: Elsevier.

Amisano, G., & Giannini, C. (1997). Topics in Structural VAR Econometrics. Springer Berlin Heidelberg.

Arwatchanakarn, P. (2019). Monetary Policy Shocks and Macroeconomic Variables: Evidence from Thailand. In Kreinovich, V. & Sriboonchitta, S. (Eds), Structural Changes and their Econometric Modeling (pp. 203-219). Springer Cham.

Bank of Thailand (2023). Statistics [Online]. Retrieved from the Bank of Thailand website: https://www.bot.or.th/th/statistics.html

 Calvo, G. A., & Reinhart, C. M. (2002). Fear of Floating. The Quarterly Journal of Economics, 117(2), 379-408.

Christiano, L. J., Eichenbaum, M., & Evans, C. L. (1999). Monetary policy shocks: What have we learned and to what end? (Vol. 1, Part A). Elsevier.

Clarida, R., Gali, J., & Gertler, M. (2001). Optimal Monetary Policy in Open versus Closed Economies: An Integrated Approach. American Economic Review, 91(2), 248-252.

Federal Reserve Economics Data. (2023). Global price of Brent Crude. [Online]. Retrieved from https://fred.stlouisfed.org/

Fischer, S. (1993). The role of macroeconomic factors in growth. Journal of Monetary Economics, 32(3), 485-512.

Fischer, S., Sahay, R., & Végh, C. A. (2002). Modern hyper-and high inflations. Journal of Economic Literature, 40(3), 837-880.

Ha, J., Kose, A., Ohnsorge, F., & Yilmazkuday, H. (2023). Understanding the Global Drivers of Inflation: How Important are Oil Prices? Washington, D.C.: World Bank Group.

Hossain, A. (2009), Central Banking and Monetary Policy in the Asia-Pacific, Cheltenham: Edward Elgar Publishing.

Hossain, A. A., & Arwatchanakarn, P. (2021). An Investigation of the Interrelations among Macroeconomic Variables in Thailand under Inflation-Targeting for the Post-Financial Crisis Period [Article]. Journal of Southeast Asian Economies, 38, 51-80.

Hossain, A. A., & Raghavan, M. (2020). The Time-Variant Sources of Inflation and Inflation Volatility and Their Interrelations and Effects on Macroeconomic Fluctuations: Evidence from Indonesia and Thailand. Journal of Business and Economic Analysis, 3(3), 228-267.

International Monetary Fund. (2006). How has globalization changed inflation? World Economic Outlook, April, Chapter 3.

Johansen, S. (1988). Statistical analysis of co-integration vectors. Journal of Economic Dynamics and Control, 12(2-3), 231-254.

Kim, S., & Roubini, N. (2000). Exchange rate anomalies in the industrial countries: A solution with a structural VAR approach. Journal of Monetary Economics, 45(3), 561-586.

Manopimoke, P. (2015). Globalization and international inflation dynamics: The role of the global output gap. PIER Discussion Paper, No 8. Bangkok, Bank of Thailand.

Manopimoke, P. (2018). Thai inflation dynamics in a globalized economy. Journal of the Asia Pacific Economy, 23(3), 465-495.

Montiel, P. (2003). Macroeconomics in Emerging Markets. Cambridge University Press.

Osorio, C., & Unsal, D. F. (2013). Inflation dynamics in Asia: Causes, changes, and spillovers from China. Journal of Asian Economics, 24, 26-40.

Poole, W., & Wheelock, D. (2008). Stable prices, stable economy: keeping inflation in check must be No. 1 goal of monetary policymakers. The Regional Economist (Jan), 4-9.

Sims, C. A. (1992). Interpreting the macroeconomic time series facts: The effects of monetary policy. European Economic Review, 36(5), 975-1000.

Yilmazkuday, H. (2021). Oil price pass-through into consumer prices: Evidence from U.S. weekly data. Journal of International Money and Finance, 119, 102494.

Yilmazkuday, H. (2022). Drivers of Turkish inflation. The Quarterly Review of Economics and Finance, 84(C), 315-323.