This paper investigates whether Thailand’s change to an inflation targeting monetary policy framework in 2000 changed the model and the effect of monetary policy by estimating a money demand function.
It obtained fourth finding. First, the monetary policy framework change did not affect the appropriate money demand function model. Second, Adoption of an inflation targeting policy occurs structural change. Third, the effect of monetary policy changes with the adoption of an inflation targeting policy. Interest rate elasticity is positive before the framework change but negative after the framework change. Its value is weak, however. Fourth, the interest rate elasticity of the package (M2,r) is stable and predictive.
This suggests that the national interest rate, rather than the exchange rate and foreign interest rates, is important to managing monetary policy. It also suggests that the same money demand function used in analyzing developed countries can be applied.