Capital flows, investor behavior, and macroeconomic policy in Thailand and other developing countries.

Abstract

The movement of international capital has become a significant concern in many developing countries, especially after the spread of financial crises to many parts of the world. This dissertation examines issues related to capital flows and monetary policy in Thailand and other developing countries. The first chapter of this dissertation focuses on whether these international capital flows destabilized the Thai stock market during the market downturn in 1997. The analysis utilizes vector auto regression analysis, market-timing tests, and correlation tests to examine foreign equity trading in Thailand. The results reveal no destabilizing consequences of foreign transactions; in fact the presence of foreigners in the market helped to cushion the market from a deeper fall in stock returns. The second chapter addresses the effectiveness of policies designed to manage the volume and composition of capital flows in developing countries. The main contribution of this chapter is the compilation of data on policies that affect capital flows collected from various sources. The policy data used here is at a higher frequency and is more disaggregated than data that has been used in the literature to date. Panel data analysis with fixed effect and instrumental variable estimation is used to study the impact of the policy variables on capital flows. The results suggest that the capital flow policies have little effect on the volume of capital flows, but significantly impact the flow composition. The last chapter estimates the Bank of Thailand's monetary policy rules; examining the central bank in responses to inflation and output deviations from target as well as its potential responses to other variables. GMM estimation is performed using monthly data from 1990 to 2001 for the full sample, and 1990 to 1997 for the fixed exchange rate sample. The estimates reveal inflation targeting of the central bank in the full sample period, but there is little evidence of this in the fixed exchange rate period. The central bank's response to output deviations is insignificant. The alternative specifications reveal no evidence of backward-looking behavior but evidence of the bank's response to the variation of the country's terms of trade.