Transmission trouble monetary policy no longer working? | Bangkok Post: business

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Transmission trouble monetary policy no longer working?

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  • Newspaper section: Business
  • Writer: TMB Analytics
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'Something has gone wrong with the monetary transmission mechanism," Paul Krugman, a Nobel laureate in economics, wrote back in December 2001 after the US Federal Reserve, led by Alan Greenspan, had cut the federal fund rate 11 times that year but failed to produce any results. 

"People often say that the Fed controls interest rates, but what it actually controls is only the interest rate. And this interest rate is, in itself, of very little economic importance."

Heretical as it may sound, is this what is going on in Thailand right now? Similar to the Fed, the Bank of Thailand conducts transactions at the policy rate _ financial institutions submit bids for the amounts they wish to borrow (or invest) from the central bank at that rate. Hence, a reduction by the rate-setting committee should lower the funding costs of commercial banks, which in turn could decide to rely a little less on deposits, thereby slashing their quotes. The fall in deposit rates normally brings lending rates down too and effectively "transmits" monetary policy to the broader economy.

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