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Ivan Tchakarov is an Economist in the Asia and Pacific Department and Selim Elekdag is an Economist in the Research Department. The authors are grateful to Nissanke Weerasinghe, Giovanni Dell’Ariccia, and the Bank of Thailand for comments and useful discussions.
We should note that, as in Neumeyer and Perri (2005), country interest rates include the U.S. interest rate plus individual countries’ EMBI spreads.
For example, since the model is based on a single representative consumer, it cannot be used to address issues of income distribution.
For example, it is not easy to split output into traded and nontraded goods or to determine the role of commodities and semifinished goods in production.
The closed economy version of the financial accelerator was developed by Bernanke, Gertler, and Gilchrist (1999).
Elekdag, Justiniano, and Tchakarov (2006), provide empirical evidence supporting the inclusion of the financial accelerator into models attempting to capture these key EMC features.
Furthermore, in the context of a flexible exchange rate regime, an increase in the foreign interest rate would induce a depreciation of the domestic currency. Given balance sheets with currency mismatches, the depreciation would inflate the value of foreign currency denominated debt, further amplifying the impact of the shock.
The slight oscillation in the impulse response functions are caused by an additional delayed increase in Thai interest rates needed to mop up second-round inflationary pressures.
The EMBIG composite spread average about 730 basis points during the 1990 to 2004 period.
Also note that, as mentioned in Section V, the magnitude of the shock is consistent with the parallel increases in the federal funds and long-term interest rates during the global bond market rout of 1994.
We assume that all regimes—including the peg—are fully credible. Some may consider this a relatively strong presumption, but it facilitates our analysis and is a natural benchmark. See Gertler, Gilchrist, and Natalucci (2003), for an example of a peg with a small probability of a collapse. Also note that, from the perspective of Thailand, there are two bilateral exchange rate: the baht/U.S. dollar rate, and the baht against the local currency unit of RoW.
Under the managed float, the weight on the exchange rate is smaller than that on inflation and the output gap.