Synergies Between Monetary and Macroprudential Policies in Thailand

IMF Working Papers, June 5, 2020

Source details

Canonical URL: Synergies Between Monetary and Macroprudential Policies in Thailand

Authors: Ichiro Fukunaga, Jie Yu
Date: June 5, 2020
Methodology: A dynamic stochastic general equilibrium (DSGE) model tailored to the Thai economy.
Shock focus: Shocks that directly impact the financial cycle.
Principal model comparison: alternative monetary policy rules (including a lean-against-the-wind rule) and macroprudential policy rules (including counter-cyclical, well targeted instruments).

The model shows that a monetary policy focused on its traditional inflation and output objectives accompanied by a well targeted counter-cyclical macroprudential policy yields better macroeconomic outcomes than a lean-against-the-wind monetary policy rule under a wide range of assumptions.
Emphasis on interactions between monetary policy and macroprudential instruments when financial-cycle shocks are present.

Prioritize a monetary policy rule targeting inflation and output stabilization as the primary tool for macroeconomic management.
Deploy well targeted counter-cyclical macroprudential policy to address financial-cycle risks and complement monetary policy.
Avoid relying primarily on a lean-against-the-wind monetary policy rule for stabilizing financial-cycle shocks, given the model’s indication of weaker macroeconomic outcomes under that approach.

Subjects: Financial sector policy and analysis; Financial sector stability; Housing; Inflation; Macroprudential policy; Macroprudential policy instruments; National accounts; Prices.
Keywords: Dynamic stochastic general equilibrium model; Financial sector stability; household LTV cap; Housing; housing loan; Inflation; inflation gap; inflation stability; Lean-against-the-wind monetary policy rule; loan; LTV rule; Macroprudential policies; Macroprudential policy; Macroprudential policy instruments; monetary policy; monetary policy transmission; Taylor; Thailand; world interest rate; world interest rate shock; WP; x inflation gap.