Guru Speak

This year the focus of BOT research included Thailand's potential output, the dynamics of inflation, the potential role of exchangerate management in looking after price stability, and the impact of globalisation on monetarypolicy effectiveness.

The symposium underscored the important role of expectations in contributing to the effectiveness of monetarypolicy transmission. As exemplified by the US experience, research pointed to the prospect that as Thai financial markets become more developed, deeper and broader, the direct impact of the central bank's changes in policy rate would be reduced. On the one hand, financialmarket development leads to a better passthrough of policy interest rate into financial market rates.

On the other hand, greater financialmarket development and globalisation of financial markets have made longerterm rates more responsive to external developments and decoupled them from the shortterm rates that policy can influence. In fact, one of the panellists, Supavud Saicheua, emphasised that financial innovation had also reduced private firms' reliance on the policy rate as a benchmark for their borrowing costs.

Since the effectiveness of monetary policy cannot be illustrated by shortterm growth performance, policymakers should take a longerterm view of enhancing the economy's growth potential through productive investment and productivity improvements, rather than just shortterm growth gains. In this regard, central bank credibility is a critical determinant of policy success.

Indeed, independence can usefully augment the central bank's credibility. As BOT Deputy Governor Bandid Nijathaworn elaborated during the panel discussion, independence does not mean the freedom to do anything the central bank likes; rather it means the ability of the central bank to make appropriate policy decisions and employ appropriate instruments of appropriate magnitude to fulfil the central bank's mandate without the constraint of political cycles.

As the choice of monetarypolicy target and the flexibility of the monetary policymaking process should take into account changing external and financial environments, additional developments that may add to the complications of monetarypolicy formulation are food and fuel prices, the dynamics of inflation and asset prices. Food and fuel prices, though costpush factors, need not be temporary, especially when they change as a result of structural shifts in supply and or demand.

The dynamics of inflation have also exhibited higher persistence of inflation, especially in the case of structural changes.

In the meantime, asset prices may not move in line with the overall economic cycle, making it possible for monetary policy to produce an unintended impact on assetprice developments. The latter is an area where macroprudential policies may produce more effective outcomes than the interestrate policy per se.

Symposium participants agreed that more research was needed to back up the decisionmaking process of monetary policy until they met again at the BOT economic symposium next year.

 The views expressed are the author's own.