Exchange Rate Pass Through Inflation in Thailand

Transcription

1 Exchange Rate Pass Through Inflation in Thailand Panit Wattanakoon 1 1 Faculty of Economics Thammasat University Setthathat 2011

2 Outline 1 Introduction 2 Inflation in Thailand from 2000 to Literature Review and Methodology 4 Research Result 5 Conclusion

3 The Importance of the Study Exchange rate plays an important role for the Thai economy due to high degree of openness millions Import Export GDP Degree of Openness (RHS) % Source: NESDB 0

4 The Importance of the Study The process that the change in exchange rate contributes to the change in inflation is called passthrough. Complete passthrough happens when the total adjustment in exchange rate causes the same magnitude of change to consumer price index. Incomplete passthrough should be observed these days as many restrictions come out in both exchange rate and product market of one economy. Nevertheless, if the exchange rate does not cause any changes to the inflation, no pass through is for such circumstance.

5 The Importance of the Study Change in Exchange Rate Imported price to consumers Imported price for intermediate inputs Cost of Production Price of Factor of Production Price Level in the economy

6 Objective and Scobe of the Study Objective To describe the behavior of consumer price index and exchange rate in the interested period To explain the relationship between inflation and exchange rate after the 1997 crisis To investigate the degree of exchange rate pass-through inflation in Thailand Scobe of the Study Thailand as a case study Avoid structural change in 1997, start around 2000 to Aug 2011

7 Inflation and Exchange Rate Consumer Price Index expresses less volatile pattern as the Bank of Thailand employs inflation targeting policy Bank of Thailand also adopted managed-float exchange rate system, trying to smooth out the fluctuation of the exchange rate. 25 % yoy B/$ CPI -15 Jan-00 Jun-00 Nov-00 Apr-01 Sep-01 Feb-02 Jul-02 Dec-02 May-03 Oct-03 Mar-04 Aug-04 Jan-05 Jun-05 Nov-05 Apr-06 Sep-06 Feb-07 Jul-07 Dec-07 May-08 Oct-08 Mar-09 Aug-09 Jan-10 Jun-10 Nov-10 Apr-11 Source: Bank of Thailand and Bureau of Trade and Economic Indices

8 Inflation and Import Consumer Price Index moves in the same direction as the import price index 120 Import Price Index Headline CPI Jan-00 May-00 Sep-00 Jan-01 May-01 Sep-01 Jan-02 May-02 Sep-02 Jan-03 May-03 Sep-03 Jan-04 May-04 Sep-04 Jan-05 May-05 Sep-05 Jan-06 May-06 Sep-06 Jan-07 May-07 Sep-07 Jan-08 May-08 Sep-08 Jan-09 May-09 Sep-09 Jan-10 May-10 Sep-10 Jan-11 May-11 Source: Bureau of Trade and Economic Indices

9 Inflation and Oil Price Inflation does get affected by Dubai Oil Price Speculation since 2007 accelerated oil price as well as inflation in Thailand Economic slump and less speculative pressure decelerated the price level in Dubai Oil Price (% yoy) Annual CPI (%yoy) RHS Soucre: Bureau of Trade and Economic Indices and Reuters

10 Inflation and Economic Growth Thai economy just came back from its recession in Inflation was modest around 2 percent for years before it picked up around 2005 due to the heating-up economy. Global financial crisis drove down both inflation and GDP growth in 2009 before rising in 2010 due to the resilience of Thai economy Annual CPI (%yoy) GDP Growth Rate (%) Source: NESDB and Bureau of Trade and Economic Indices

11 Policy Package Inflation Targeting Monetary Policy Implemented since May 2000, targeted core CPI: percent Change to percent in September, 2009 To be approved by the cabinet, new inflation target aims at curbing headline CPI within the range of 3.0 ± 1.5 sd. evaluated each year so more flexible to cope with unexpected shocks easier to understand by the public as it directly reflexes standard of living use standard deviation to be in accordance with other competitors Price Subsidy to Energy Price Once energy price increases, supported by oil fund Price Administration from Ministry of Commerce Ask private sector to hold price of certain necessary goods so that cost of living is not affected

12 Literature Review Various studies employed various models to investigate the degree of pass through in several countries, incomplete found and decreasing in magnitude over the past years, Dornbusch (1987), Hopper and Mann (1989), Dwyer, Kent and Pease (1993), Campa and Goldberg (2002), Wickremasinghe and Silvapulle (2004), Korthonen and Wachtel (2005), Kiptui, Ndolo and Kaminchia (2005), Mishkin (2008), Barhoumi and Jouini (2008). This paper will use the model applied in Chai-anant, et al (2008)

13 Methodology Equation P t = β 0 + β 1 e t + β 2 mpi t + β 3 oil t + β 4 Pm t where: β i = Cointegrating Factors P t = Consumer Price Index e t = Exchange Rate (B/$) mpi t = Manufacturing Production Index oil t = Index of retail prices of ULG 95 (BKK) Pm t = Import Price Index

14 Methodology To find the short run relationship, the Error Correction Model (ECM) will show the behavior of exchange rate how it corrects itself to the long-run equilibrium ECM P t = α 0 + α 1 ECM t 1 + p i=1 γ 1i oil t i + p i=1 γ 2i Pm t i + p i=1 γ 3i mpi t i + p i=1 γ 4i e t i where ECM = P t β 0 + β 1 e t + β 2 mpi t + β 3 oilt + β 4 Pm t

15 Econometric Test Unit-root test to find whether the data is stationary which can be manipulated in the model Cointegration test with Augmented Dickey-Fuller Test, will be adopted to find whether the interested variables will reach their long-run equilibrium.

16 Unit Root Test Unit Root Test at Level Variable t-statistics 5% critical value Result CPI Non Stationary Oil Non Stationary Import Price Non Stationary MPI Non Stationary Exchange Rate Non Stationary

17 Unit Root Test Unit Root Test at Difference Variable t-statistics 5% critical value Result CPI Stationary Oil Stationary Import Price Stationary MPI Stationary Exchange Rate Stationary

18 Cointegration Test Result P t = e t oil t mpi t Pm t R 2 = Adjusted R 2 = * all variables are significant at 0.05 level. Variable t-statistics 5% critical value Result Residual Stationary It shows that the absolute value of ADF statistics is greater than that of critical value. Therefore, Consumer Price Index (P), oil price index (oil), Imported Price in term of dollar (Pm), Manufacturing production index (MPI), and exchange rate (e) have long-run relationship.

19 Error Correction Model ECM P t = e t mpi t oil t Pm t ECM t 1 R 2 = Adjusted R 2 = * at 0.05 level of significance Equation above indicates short-run adjustment toward long-run equilibrium with the change in overall system. Coefficient of adjustment is , which means the error correction process will take place from the actual value to the long-run equilibrium by each period.

20 Policy Implication The depreciation and appreciation of Thai baht will have certain impact to inflation in Thailand This study reveals that there is 4.70 percent of passthrough from exchange rate to inflation, and the value will be corrected by percent in each period Jitpokkasame (2007) applied quarterly data from 1995 to 2005 and found that the degree of passthrough is percent, and correcting itself by percent per quarter. Chai-anant et al. (2008) found that there is 20.6 of passthrough for the Thai economy with correction process by percent in each month. This paper can also conclude that overtime, lower degree of passthrough is identified.

21 Policy Implication A decline in degree of passthrough overtimes Coefficient of Passthrough Jan-05 Mar-05 May-05 Jul-05 Sep-05 Nov-05 Jan-06 Mar-06 May-06 Jul-06 Sep-06 Nov-06 Jan-07 Mar-07 May-07 Jul-07 Sep-07 Nov-07 Jan-08 Mar-08 May-08 Jul-08 Sep-08 Nov-08 Jan-09 Mar-09 May-09 Jul-09 Sep-09 Nov-09 Jan-10 Mar-10 May-10 Jul-10 Sep-10 Nov-10 Jan-11 Mar-11 May-11 Jul-11 Note: X-axis indicates the range of data used from January 2000 to that point in time. Each point represents the degree of passthrough from each cointegration equation

22 Policy Implication Price level will correct itself with higher magnitude than in the past to achieve long-run equilibrium as there are more restrictions toward the adjustment Jan-05 Mar-05 May-05 Jul-05 Sep-05 Nov-05 Jan-06 Mar-06 May-06 Jul-06 Sep-06 Nov-06 Jan-07 Mar-07 May-07 Jul-07 Sep-07 Nov-07 Jan-08 Mar-08 May-08 Jul-08 Sep-08 Nov-08 Jan-09 Mar-09 May-09 Jul-09 Sep-09 Nov-09 Jan-10 Mar-10 May-10 Jul-10 Sep-10 Nov-10 Jan-11 Mar-11 May-11 Jul Correction Coefficient Note: X-axis indicates the range of data used from January 2000 to that point in time. Each point represents the correction coefficient from each ECM

23 Policy Implication With less transmission between exchange rate and inflation, currency flexibility will be realized since the change in exchange rate will not be passing through domestic price level that much. So more rooms are for central bank to curb with external balances without hurting the price stability Nevertheless, Bank of Thailand still needs to keep their eyes on both currency and inflation management

24 Limitation and Future Research This research can also be extended to investigate in detail on each category of goods and services. Other currencies can be added in the model to find their impacts to the price level in one economy.

25 Conclusion Baht has been appreciating since Various factors adversly affect inflation in Thailand Inflation targeting monetary policy, price administration and special programs from government authorities have alleviated inflationary pressure to the Thai economy The study finds that there is 4.70 percent of pass through from exchange rate to inflation in the long run. In each month, consumer price index will correct its error by percent and achieve its long-run equilibrium

26 Conclusion Thank you for your attention