Integration in the Global Economy
New Horizons in Money and Finance series
Edited by Suthiphand Chirathivat, Emil-Maria Claassen and Jürgen Schroeder
Chapter 9: Inflation targeting after the currency crisis: the case of Thailand
Chayodom Sabhasri, June Charoenseang and Pornkamol Manakit 9.1 INTRODUCTION This study is divided into several sections. First, the chapter briefly reviews the changes in the choice of monetary framework of East Asian countries. The advantages of inflation targeting over its alternatives, as well as the challenges to its implementation, are also discussed. In the following section, the relationship between exchange rate volatility and inflation targeting has been explored, to evaluate an open economy with an inflation targeting framework. The experiences of the developed and developing countries are summarized in the next section. In particular, the economic performance of the Korean economy is briefly presented in order to observe its performance after the implementation of inflation targeting methods. Later, the study discusses how the interdependence of monetary policy and fiscal policy affects the rate of inflation, and how government budget deficits can influence inflationary pressures. Finally, inflation targeting in Thailand is analyzed as a new macroeconomic management policy. The outcome of this policy could be undesirable and inappropriate if it leads to a public debt crisis or high inflation rates. A fiscal stimulus package is needed to boost the economy, but the risk of taking on an excessively high government budget deficit does not always result in higher returns, and yet could yield devastatingly long-lasting outcomes. 9.2 THE INFLATION TARGETING ALTERNATIVE During the initial stages of financial liberalization, the real appreciation of pegged currencies (baht, peso, rupiah, ringgit, won) that fixed their currencies to the 162 Inflation targeting after the currency...
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