On the other hand, the postpandemic recovery in aggregate demand has been much stronger in the US, with a much tighter labour market. At the opposite end of the spectrum is what I would call the “academist approach” – although it comes from Lars Svensson, a one-time practitioner who was, among others, Deputy Governor of the Swedish Riksbank between 2007 and 2013. It would be to look purely forward and do inflation forecast targeting. The central bank then works out an interest rate path that is compatible with bringing inflation back to the target over the forecast horizon (and staying there). Simple models, such as the original Svensson’s one (1997)ii, can be inverted to find a single policy interest rate – “the target-compatible rate”. With more complex models, target-compatible paths can be found through interest rate scenarios. This approach is appealing in theory but raises several practical problems. First, it relies heavily on having a very accurate model and clear identification of the shocks hitting the economy, including how persistent these will be. The substantial forecast revisions over recent quarters underline quite how difficult it is to calibrate policy based on forecast targeting. A second, and more subtle, problem is the “stationarity” of most macroeconomic models. This is either true by assumption in standard New-Keynesian models or implicit in empirical forecasting models. For either reason, forecast inflation has a tendency to revert to the target or the historical mean under almost any scenario.
More than once, they brought on political tension, between those in the government who believed in it and those in the opposition, or even the military, who thought otherwise. In one incident, it even caused a change in the central bank governor. Finally, we had to float our currency in 1997. Since then, we have adopted Inflation Targeting as our monetary policy framework. A core inflation target was announced at between 0 and 3.5 % per annum. The central bank will regularly monitor economic changes and make forecasts. If we see that the rate of inflation has a tendency to exceed the range, we will adopt a tighter monetary policy stance by increasing the policy interest rate, and vice versa if we see it going under the range. The policy rate that we use is the 14 day repurchase rate. BIS Review 48/2002  1  This is completely different, of course, compared to the days of fixed currency regime when interest rates in Thailand would move mostly in tandem with the US rates. The change in the monetary policy framework therefore affects the financial environment and your businesses a great deal. Development of the bond market What other change also happened? One very important change that has occurred in Thailand is the rapid development of the bond market, which took off after the 1997 crisis. The bond market is an important tool for safety and soundness of the financial institution system.