Monetary Policy and the First- and Second-Moment Exchange Rate Change during the Global Financial Crisis : Evidence from Thailand

Using a sample of monetary policy announcements in Thailand over the period 2003–2011, I show that a monetary policy surprise tends to affect the return and volatility of the Thai baht. In the full sample, a 1% unexpected increase in the policy rate leads to an about 1.8% depreciation of the baht against the Japanese yen. During periods of high interest rate differentials, an unexpected increase in the policy rate leads to a substantial depreciation of the baht against the US dollar (about 1%) and the British pound (about 2.6%). While Thai monetary policy surprises have no effect on the baht against the dollar in the spot market, they have a significant effect on the baht against the dollar in the forwards market. During the non-financial crisis period, an unexpected increase in the policy rate on average results in a large depreciation of the baht/dollar forward rates: 6.6% and 13.7% for two-month and three-month forward rates, respectively