Macroeconomic management under the global financial crisis

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Macroeconomic management under the global financial crisis . Bhanupong Nidhiprabha Thammasat University. Fixed vs. managed flexible regimes. Source: International Financial Statistics. EC:204 Economic Change in Thailand. J.C. Ingram(1971) Economic Change in Thailand, 1850-1970 - PowerPoint PPT Presentation

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Lessons from Thailands exchange rate policy

Macroeconomic management under the global financial crisis Bhanupong NidhiprabhaThammasat UniversityFixed vs. managed flexible regimes2Source: International Financial StatisticsEC:204 Economic Change in ThailandJ.C. Ingram(1971) Economic Change in Thailand, 1850-1970 Stanford University PressStolper & Samuelson P.F. Bell3Dates and magnitudes of devaluationsDatesPer centMay 19811.1July 19818.7November 198414.8December 19851.9July 2, 1997Baht float4Cheaper dollar in the long run5Source: International Financial StatisticsImportant dates in SeptemberSeptember 11, 2001September 19, 2006: A turning point in Thailands historySeptember 7, 2007. The US government seized control of Fannie Mae and Freddie MacSeptember 15, 2008: Lehman Brothers filed for bankruptcy.Have history and precedent no bearing on current financial crisis?

6The last remaining growth engine7Source: Bank of ThailandThe long-run relationship8

Source: Bank of ThailandExchange rate volatility

9Source: Bank of Thailand

10Loss of international competitiveness?Source: International Financial StatisticsA policy faux pasDecember 18, 200611Source: Bank of ThailandInternational reservesAccountability TransparencyFinancial loss12Increasing fluctuations of long-term flowsWhy?

13Source: Bank of ThailandCapital flows to the banking sector

14Source: Bank of ThailandEC330: Economics of Money and BankingSS&WERTC: Impact of interest income taxes on bank deposits15Dwindling short-term borrowing

16Source: Bank of ThailandThe yen-carry tradeThe breakdown of the interest parity condition

17Source: International Financial StatisticsIt started in 2002 in response toSeptember 11, 2001

18Source: International Financial StatisticsResidential estate price-income ratio rising in tandem with increased debt-to-income ratio19The housing price bubble burst in mid-2006 and both housing prices and housing starts began a long period of contraction. With declining home prices, borrowers were unable to refinance their loans and default rates soared.CDO and CDS are WMD20The collapse of housing prices March 2009(y-o-y)

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Source: The EconomistPolicy responsesFiscal policy stimulusEasy monetary policyExport expansionCompetitive exchange rateDomestic consumption-led growth

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Results from A Vector Autoregressive ModelExports and domestic consumption contribute most to output growth.Exchange rate changes have relatively smaller impact on output when compared to changes in fiscal stimulus and key interest rates.Unlike fiscal expansion, monetary policy has longer lag but predictable impacts on output.

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25Impacts on exports of various shocksAn appreciation of the real effective exchange rate results in a decline in exports.Exports depend on flexible and resilient output adjustments.Fiscal stimulus does not stimulate exports.Tight monetary policy does not adversely affect the export sector.

26Lights at the end of the tunnelThere are signs indicating a bottoming out of the 2009 recession.A mild recovery in 2010 is expected, provided that improved business sentiment remains.

27Capital market and flows of hot money28

29Source: The EconomistConclusionThailands exchange rate policy exhibits long-term consistency of market intervention.Output recovery depends on consumption rebound which requires regained consumer confidence.Exports are the remaining growth driver in Thailand; they are mainly determined by conditions in the world market rather than the weak currencies.

30Concluding remarksOld habits die hardOptimistic tendency of human behavior Tendency to forget the lessons of the pastThere will be other banking crises.3132Time is a great teacher, but unfortunately it kills all its pupils.

Berlioz, Hector (1803-1869)

33The best teachers taught us to give our best.

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