Abstract
This paper examines exchange rate pass-through (ERPT) to the consumer price in Thailand based on a simultaneous-equation model consisting of the IS, LM and AS function. It employs comparative static analysis to determine the impact of a change in an exogenous variable on the equilibrium price level. The paper finds that a 1% depreciation of the Thai baht tends to cause the CPI to rise by 0.0696% and has declined since the adoption of inflation targeting in 2000. In addition, more money supply, more government deficit as a percent of GDP, a higher crude oil price, a higher U.S. CPI, and a higher expected price tends to raise Thailand’s CPI. The findings suggest that in addition to the exchange rate, other relevant variables such as fiscal policy, monetary policy, the crude oil price, U.S. price level and the expected price level are expected to impact the consumer price level.
Highlights
Consumer prices in Thailand have continued to rise with the exceptions in 2009 and 2015
The finding that exchange rate pass-through (ERPT) to the consumer price declines after the adoption of inflation targeting is consistent with the results reported by Aleem and Lahiani (2014) and Dilla, Achsani and Anggraeni (2017) but in contrast with the finding presented by Prasertnukul, Kim and Kakinaka (2010)
This paper has examined ERPT to consumer prices in Thailand based on an extended IS-LM-AS model
Summary
Consumer prices in Thailand have continued to rise with the exceptions in 2009 and 2015. The inflation rate of 7.94% in 1998 was mainly caused by the substantial depreciation of the Thai baht during the Asian financial crisis. Since 2014, the percent change in consumer prices was less than 2.0%, suggesting that monetary policy by adopting inflation targeting has been relatively successful in recent years. Exchange rate pass-through (ERPT) to domestic prices has been a concerned subject for Thailand as it was the origin of the Asian financial crisis in the 1990s. It is an empirical question as to how the consumer price would react to the depreciation of the Thai baht. To the author’s knowledge, few of previous studies have applied and extended IS-LM-AS model in studying ERPT to consumer prices in Thailand. The paper uses an extended IS-LM-AS model incorporating the exchange rate in the money demand function. Comparative static analysis is employed to determine how exchange rate movements would affect the equilibrium price level
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