Natural real exchange rate of baht

Abstract

The objective of this study is to analyze the determinants of real exchange rate and the equilibrium of the non-tradable relative price. To find the equilibrium of real baht during period 1980.1-1997.4, we use the Natural Real Exchange Rate model (NATREX) which employed a The Johansen methods used to estimate the long-run macroeconomics balance approach. relationship in both models. The results of co-integration indicates that the productivity has positive effect but statistically insignificant on non-tradable relative price. Thrift, term of trade, and foreign real long term interest rate have negative effect on non-tradable relative price. The co-integration results of the real exchange rate model indicated that the productivity has positive effect on real exchange. Thrift, term of trade, and foreign real long term interest rate have negative impacts on real exchange rate . The short term adjustment coefficient indicated that the haft life of adjustment of non-tradable relative price and real exchange rate are about 1.2 and 1 quarters respectively. The results of co-integration also indicates that before the Baht crisis, the non-tradable relative price and real exchange rate were overvalued by 56.8 percent, and 23.5 percent in 1997.02 respectively. The forecasting results of forecasting show that the actual real exchange rate undervalued on average 20 percent in during 1998.01-1999.03.