How Does the Policy Rate Respond to Output and Prices in Thailand?

This paper attempts to examine how the policy rate as a monetary policy stance reacts to output and price level in Thailand during 2005Q1 and 2016Q2. An empirical relationship that characterizes the way the Bank of Thailand adjusts its policy rate to output growth and inflation is identified. Johansen ointegration technique and VAR methodology are used in the analysis. The results from the cointegration analysis show that there exists a long-run relationship of the policy rate with real GDP and prices. This long-run equation differs from the empirical Taylor-type rule. However, the result from short-run dynamics captures the short-run interest rate equation. The partial adjustment coefficient in the estimated interest rate equation is negative and highly significant, which indicates that any deviation of the policy rate from its equilibrium value is corrected by monetary policy actions. Furthermore, there is long-run causality running from inflation and economic growth to a change in policy rate. In the short run, economic growth negatively causes a change in the policy rate while inflation positively causes a change in the policy rate. Also, impulse response analysis from an unrestricted VAR model indicates that both output growth and inflation shocks cause fluctuation in the policy rate.