Future Exchange Rate Policy: Rules or Discretion?
Dr Kriengsak Chareonwongsak
Senior Fellow, Harvard Universityrsquo;s Mossavar-RahmaniCenter for Business and Government
Thai Baht appreciation is now the hottest issue in Thailand with various measures proposed for government and Bank of Thailand (BOT) action.
In my opinion, however, these are rather ad-hoc short-term strategy proposals that should give way to a long-term exchange rate policy process. But, will rules or discretion provide better, more desirable long-term solutions?
Economically speaking, discretionary policies are made by authorized policymakers with freedom to act in accordance with their own judgment, using their personal discretion. This freedom to adapt the goals or the policy-means of policy provisions according to context must render them discretionary policies in some manner, and also infers an alignment with Keynesian macroeconomics theory, encouraging government intervention in economic activity.
By contrast, laws restricting policymakersrsquo; discretionary judgments have been abolished, thus committing them to goal achievement without external reference, congruent with neoclassical macroeconomic theory in which the market mechanism operates under rules of law.
In the past, many economists believed discretion to be better than rules.Discretionary judgment allows quick policy adjustment under uncertain circumstances, whereas rules are fixed to legislation.
However, economists are now, in practice, beginning to prefer rules over discretion. Authoritatively overbearing policymakers are worse than those restricted by rules, and commitment to policy is a necessary condition to reach policy goals, as private sector confidence is lost where there is no commitment to policy. This claim was proven in the Nobel prize-winning paper of Kydland and Prescott (1977), ldquo;Rules rather than Discretion: The Inconsistency of Optimal Plans.rdquo;
Discretionary policies operate in the context of exchange rate policy, including policymaker judgments that determine exchange rate intervention, both on the demand and supply side of foreign currencies. But, in my opinion, almost every exchange rate proposal becomes discretionary in nature, implementing the provisions under somebodyrsquo;s judgment and without previous commitment, though by law, the exchange rate stabilization policy is committed to assigned goals that the exchange rate ldquo;hostrdquo; must accomplish. BOTrsquo;s inflation targeting approach provides the best example of policymaker commitment. BOTrsquo;s assigned goal of keeping the inflation rate lower than the target rate was accomplished by implementing monetary instruments, with its success testified to in Thailandrsquo;s low inflation rate after economic crisis.
However, there is no organization committed to exchange rate stabilization goals. Though BOT is responsible for exchange rate stabilization, there is no commitment to this goal. Therefore, the private sector tends to treat Thai Baht speculation as easy to implement.
Clearly, the government must delegate its commitment to exchange rate stabilization, if legislated, also for the sake of private sector confidence. However, the exchange rate should be partially flexible and free to change according to the market mechanism. I would therefore propose that a legal ruling cite the respective potency of instruments of change and designate these according to exact levels of fluctuation. This would lead to private sector expectations in relation to future exchange rate trends. The making of good rules is inevitable. But where rules lack and are biased, there are also harmful effects for the country.
เผยแพร่:
Living in Thailand
เมื่อ:
2007-10-01