Optimal Monetary Response in an Estimated Dynamic New Keynesian Model for Thailand

This paper explores the plausible channel through which recent development on monetary policy analysis can be extended into the context of Thailand. In particular, we develop a simple monetary policy model, and address an example of the problem on optimal policy response within the Dynamic New Keynesian macroeconomic model whose structural equations are derived from optimizing-agent principle. Several of common features such as habit formation, nominal price rigidity and price indexation, are assumed in our equilibrium model. The resulting equilibrium, as derivable from optimality condition imposed by rational agent, is then estimated with quarterly data of Thailand by iterative GMM. Parametric estimation under the case that ARIMA process is used as the definitional variable of potential output for the period during which estimated data is missing suggests an impressive finding as all estimates are statistically significant. Computational experiment on welfare analysis suggests that the optimal monetary response under supply shock requires an aggressive increase in nominal interest rate by almost eight percent. This finding is rationalized by the low value of elasticity of output gap to real interest rate which lessens the ability for central bank to steer aggregate demand toward desirable direction