After the Asian financial crisis in 1997, Thailand’s monetary policy has changed to a flexible inflation targeting framework since May 2000 to aim for price stability and economic growth. This paper provides an empirical study towards the relationship of inflation and consumption in Thailand for both durables and non-durables consumption as consumption is a primary component of the GDP that drives future economic growth.
The results support the previous studies that there is negative long-run relationship between inflation and consumption. However, considering only the period after inflation targeting regime adoption, the results show positive relationship. Furthermore, the paper examines the response of consumption to inflationary shock. The results show inflationary shock negatively affects all types of consumption but positively affects after adopting the regime, except for non-durables. Particularly, the impact is more pronounce in case of durables relative to non-durables. Additionally, the impact from the shock becomes lower and converges back to equilibrium level faster after Thailand applied inflation targeting regime. Lastly, the result from Forecast Error Variance Decomposition concludes the variation of overall consumption that comes from inflation increases after adopting the regime.
In addition, the findings prove that with flexible inflation targeting framework, the negative impact of inflation on consumption is lower.