Thai Business Cycles: Theory and Practice
This thesis documents the stylized facts of the business cycle in Thailand and analyzes the ability of real business cycle models to capture these facts. The models are solved by the method of finding a linear approximation to the first order condition proposed by King, Plosser and Rebelo (1988). By using the Baxter and King band pass filter to extract the cyclical component, we find that the volatility of investment and government spending are higher than that of aggregate output. The striking feature in developing countries, including Thailand, is that consumption is more volatile than output. These variables in general are pro-cyclical and highly persistent. Net exports are highly volatile and counter-cyclical. The business cycle features of developing countries tend to be more volatile than those of developed countries. The output fluctuations of the Asian countries are positively correlated. A real business cycle model is constructed and it includes permanent, pure and realistic shocks to technology and government spending. The technology shock of Thai economy during 1993-2006 is significantly persistent. The government spending shock cannot generate the real business cycle properties. The multiple shocks and the shocks off steady state are introduced to alternatively study the effect of fiscal policy by replicating the 1997 Asian crisis. The government spending seems to have a limited applicability for this model. The model fails to explain a high volatility of consumption. The difference between theory and data is also present in the volatility and contemporaneous correlation with output of labour, wages and interest rate. A one good two country international real business cycle model with complete market in line with Baxter and Crucini (1995) is built to explain the international facts of Thailand. The relationship between the Thai real aggregate fluctuations and those of the US from 1993-2006 is investigated. Technology spillovers significantly transfers from the US to Thailand, not another way around. The contemporaneous correlation of technology innovation of Thailand and the US is negative. The impulse response is done for permanent and realistic shocks of technology, government spending and taxation. The shocks off the steady state and the multiple shocks are also explored in the context of the open economy model. It is obvious from this analysis that large countries do not respond to small country shocks. Small countries, particular openness, are dominated by large iii country shocks. The responses in Thailand are significant if the shocks are originated in the US. The model requires a high variance of technology innovation to explain the Thai facts. The shock in the US can explain the co-movement in Thailand better than the shock originates in Thailand itself. The model performs poorly to match the data in term of international co-movement and predicts that the cross correlation of consumption is higher than that of output.
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