Exchange Rate Policy and Its Consequences

The choice of exchange rate policy is said to be inconclusive and there is no one particular policy that best suits one country (Hefeker 2000; Visser 2000). In most cases, the choice of exchange policy can be varied from one to another depending on the countries’ economic policies and conditions (Collignon et al. 1999). In the case of Thailand, the fixed or pegged exchange rate had been in use since 1955. Later, this was replaced by a new system called a ‘basket of currencies’ to accommodate the financial liberalisation of the early 1990s. This chapter explores the consequences of Thailand’s exchange policy in the light of financial liberalisation. It proceeds with a summary of the Purchasing Power Parity (PPP) concept which forms the core in explaining several theories of exchange rate determination. Section 6.3 provides brief background of Thailand’s exchange rate policy. Section 6.4 studies the development of the basket of currencies and reviews the overall exchange rate of Thailand after this policy was implemented. Section 6.5 analyses the consequences of the basket of currencies on the Thai economy, focusing on trade growth and the increase in foreign funds to financial markets via the commercial banks and the BIBF. Additionally, in this section, we include a study of the lending behaviour of these two financial institutions by sector. Finally, Sect. 6.6 provides a summary of the chapter.