How has globalisation impacted on monetarypolicy effectiveness?

 Having a small and increasing¬ly open economy, it is often argued that macroeconomic developments in Thailand may increasingly be shaped by exter¬nal forces. The fact is, the gross domestic products of Thailand and the rest of the world tend to fluctuate together over time as the degree of integration rises.

It is not clear whether mone¬tarypolicy effectiveness should grow or diminish as domestic financial markets are developed as a result of financial globalisa¬tion. A more efficient financial market can carry the policy inter¬estrate signal forward along the yield curve more efficiently. Meanwhile, domestic financial conditions may have been increasingly influenced by global financial conditions, and domes¬tic monetary policy may have already lost the ability to influ¬ence financial conditions, and through it, the rest of the econo¬my.

To what extent have interna¬tional forces affected the deter¬mination of key macroeconomic variables in Thailand? Has glob¬alisation weakened the ability of Thai monetary policy to influence domestic economic and financial outcomes? My colleagues Suchot Piamchol, Bunnaree Punnarach and Tientip Subhanij will join me in pre¬senting our research findings at the cen¬tral bank's annual symposium to be held this week.

Our findings can be summarised thus:

First, we find that the global macroeco¬nomic and financial influence on econom¬ic variables in Thailand is signifi¬cant. Whether global forces have gained in importance is incon¬clusive for the overall economy, but that influence has intensified for sev¬eral selected variables.

Second, we have also identi¬fied statistically sig¬nificant changes in the relationship between international forces and Thailand's economic dynamics over the past several years.

Third, we have found that the recent changes in monetarypolicy effectiveness are not likely to be due to the direct influence from glob¬alisation, but are mostly due to the change in the rela¬tionship among domestic variables themselves as they have developed.

Over time, Thai monetary poli¬cy seems to have more or less maintained its effectiveness on inflation. Monetary policy has been less effective in influencing the energy components in the consumer price inflation meas¬ure. We think that the explicit focus on longterm underlying, or core inflation has contributed to a lower inflationoutput tradeoff over the past several years. Monetary policy seems to have become more efficient for this purpose. Evidence also suggests that this improvement seems less likely to have come from the ability to have an impact on realsector variables, credit, longterm rates or the exchange rate, but more likely from better anchoring of the inflation expec¬tations of the public.

In short, we have found evi¬dence to the effect that interna¬tional economic developments matter in the fluctuations of Thailand's macroeconomic vari¬ables. Monetary policy's ability to influence overall domestic events seems to have been somewhat diminished, with no evidence that this is mainly due to globali¬sation. Meanwhile the ability of the central bank to ensure longterm price stability seems to have remained largely intact.

ASHVIN AHUJA is team execu¬tive of the Monetary Policy Group, Bank of Thailand. The views expressed are the author's own.