13. The tight monetary policy was regarded as essential to dampen capital outflow.
By September 1997, short-term interest rates increased by about 1000 basis points from prefloat
levels, and continued at high levels until about the third quarter of 1998 (table 5). Some
analysts, such as Krugman (1998b), see this as being necessary to try to stem capital outflow
at a time when net foreign reserves have almost been depleted. The tight monetary policy fits
in with the IMF's strategy of trying to maximise the rollover of short-term debt, given that it
was expecting the current account deficit to continue. However, the strategy was not
particularly effective. Once the market realises that net foreign reserves have almost been
depleted, the Baht depreciated rapidly. An increase in interest rates by about 1000 basis
points is hardly sufficient incentive to continue to keep Baht denominated assets. From the
start of the float to January 1998, the US$ strengthened against the Baht by more than 100%,
so Baht interest rates would have to been extremely high to provide sufficient incentives to
rollover short-term debt that matured. Nevertheless, I do believe that a fairly tight monetary
policy was necessary. This is not so much for providing effective incentive to prevent net
capital outflow, but rather to control inflation so that the potential benefits of a weaker Baht
would not be wiped out through inflation getting out off control.
13. The tight monetary policy was regarded as essential to dampen capital outflow.By September 1997, short-term interest rates increased by about 1000 basis points from prefloatlevels, and continued at high levels until about the third quarter of 1998 (table 5). Someanalysts, such as Krugman (1998b), see this as being necessary to try to stem capital outflowat a time when net foreign reserves have almost been depleted. The tight monetary policy fitsin with the IMF's strategy of trying to maximise the rollover of short-term debt, given that itwas expecting the current account deficit to continue. However, the strategy was notparticularly effective. Once the market realises that net foreign reserves have almost beendepleted, the Baht depreciated rapidly. An increase in interest rates by about 1000 basispoints is hardly sufficient incentive to continue to keep Baht denominated assets. From thestart of the float to January 1998, the US$ strengthened against the Baht by more than 100%,so Baht interest rates would have to been extremely high to provide sufficient incentives torollover short-term debt that matured. Nevertheless, I do believe that a fairly tight monetarypolicy was necessary. This is not so much for providing effective incentive to prevent net capital outflow, but rather to control inflation so that the potential benefits of a weaker Bahtwould not be wiped out through inflation getting out off control.
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