Thai inflation dynamics in a globalized economy

Abstract

This paper investigates whether changes in Thai inflation dynamics during recent decades can be attributed to the process of globalization. The empirical analysis is based on a dynamic factor model and an unobserved components model that is consistent with an Open Economy New Keynesian Phillips curve. The findings suggest that in the short-run, Thai inflation has become increasingly sensitive to global factors since 2001, while becoming less reliant on domestic ones. During 2001–2007, the importance of this global factor can be attributed to a global output gap, while in the period thereafter, it only corresponds to world oil price movements. While global factors are important, Thai inflation is still heavily influenced by domestic monetary policy in the long-run. The implementation of an inflation targeting framework in May 2000 by the Bank of Thailand has led to improved inflation behavior through better anchored long-term inflation expectations.

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