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Macroeconomic management under the global financial crisis

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

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Macroeconomic management under the global financial crisis

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  1. Macroeconomic management under the global financial crisis BhanupongNidhiprabha Thammasat University

  2. Fixed vs. managed flexible regimes Source: International Financial Statistics

  3. EC:204 Economic Change in Thailand • J.C. Ingram(1971) Economic Change in Thailand, 1850-1970 Stanford University Press • Stolper & Samuelson • P.F. Bell

  4. Dates and magnitudes of devaluations

  5. Cheaper dollar in the long run Source: International Financial Statistics

  6. Important dates in September • September 11, 2001 • September 19, 2006: A turning point in Thailand’s history • September 7, 2007. The US government seized control of Fannie Mae and Freddie Mac • September 15, 2008: Lehman Brothers filed for bankruptcy. • “Have history and precedent no bearing on current financial crisis?”

  7. The last remaining growth engine Source: Bank of Thailand

  8. The long-run relationship Source: Bank of Thailand

  9. Exchange rate volatility Source: Bank of Thailand

  10. Loss of international competitiveness? Source: International Financial Statistics

  11. A policy faux pasDecember 18, 2006 Source: Bank of Thailand

  12. International reserves • Accountability • Transparency • Financial loss

  13. Increasing fluctuations of long-term flowsWhy? Source: Bank of Thailand

  14. Capital flows to the banking sector Source: Bank of Thailand

  15. EC330: Economics of Money and Banking • SS&W • ERTC: Impact of interest income taxes on bank deposits

  16. Dwindling short-term borrowing Source: Bank of Thailand

  17. The yen-carry tradeThe breakdown of the interest parity condition Source: International Financial Statistics

  18. It started in 2002 in response toSeptember 11, 2001 Source: International Financial Statistics

  19. Residential estate price-income ratio rising in tandem with increased debt-to-income ratio

  20. The 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 WMD

  21. The collapse of housing prices March 2009(y-o-y) Source: The Economist

  22. Policy responses • Fiscal policy stimulus • Easy monetary policy • Export expansion • Competitive exchange rate • Domestic consumption-led growth

  23. Results from A Vector Autoregressive Model • Exports 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.

  24. Impacts on exports of various shocks • An 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.

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

  26. Capital market and flows of hot money

  27. Source: The Economist

  28. Conclusion • Thailand’s 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.

  29. Concluding remarks • Old habits die hard • Optimistic tendency of human behavior • Tendency to forget the lessons of the past • There will be other banking crises.

  30. Time is a great teacher, but unfortunately it kills all its pupils. Berlioz, Hector (1803-1869)

  31. The best teachers taught us to give our best.

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