Essays on the monetary policy transmission in Thailand

Abstract

This study comprises two essays. The first essay employs a Markov-Switching Vector Autoregression (MS-VAR) framework to analyze the role of the bank lending channel in the transmission of monetary policy in Thailand, considering regime shifts under different economic conditions. It examines whether monetary policy exerts asymmetric effects through the bank lending channel depending on the prevailing economic regime and evaluates the responses of various loan types to policy shocks. The findings from the MS-VAR models highlight the significance of the bank lending channel in monetary policy transmission. During stable economic conditions, policy tightening effectively influences real output, prices, and lending activities, with no evidence of a price puzzle, demonstrating the central bank’s effectiveness in maintaining economic stability. However, the impact of monetary policy diminishes during periods of heightened volatility, as seen during financial crises, when complex interactions among macroeconomic variables weaken the transmission of policy measures. In such volatile environments, conventional monetary policy tools, such as interest rate adjustments, may lose their effectiveness. This study suggests that unconventional measures or targeted lending programs can play a crucial role in stabilizing the economy. Initiatives by monetary authorities and commercial banks, such as soft loans or debt relief programs, could also help alleviate the crisis's impact on borrowers. Additionally, the study underscores the importance of coordinating monetary and fiscal policies, especially during economic instability. The second essay further examines the effects of monetary policy changes on the housing and real estate markets in Thailand. The findings from the MS-VAR models reveal the presence of two distinct regimes within the Thai housing market, leading to asymmetric impacts of monetary policy. Specifically, the analysis indicates a clear asymmetry in the effects of monetary policy shocks, represented by changes in the policy rate, on housing loans across different market segments. The contraction in housing loans is more prolonged during the low-volatility regime, or normal market conditions, compared to the high-volatility regime. This suggests that the effectiveness of monetary policy varies significantly across different economic environments. Hence, the presence of a nonlinear relationship between housing variables, economic indicators, and the monetary policy instrument highlights the need for caution in using traditional tools, such as the policy interest rate, to manage overheating in the housing and real estate markets. As a result, it is important to explore the effectiveness of unconventional monetary measures that specifically target certain market segments. These instruments may be more suitable for correcting imbalances within the housing market. Potential policy options include lowering Loan-to-Value (LTV) ceilings for targeted areas of concern and enforcing stricter Debt Service Ratio (DSR) requirements within the framework of responsible lending. Such measures would prompt financial institutions to more thoroughly evaluate customer affordability, thereby promoting responsible lending practices and reducing risks in the housing sector.