Analysis of Real Exchange rate: Case study of Thailand

Abstract: This paper examines the explanatory variables that can affect the real exchange rate (RER). It aims at investigating the way in which RER (real exchange rate) misalignment relates to the Thai economy in regarding the financial crisis, capital control policy imposed by the central Bank of Thailand (BOT), and import/export. The RER (real exchange rate) at the equilibrium level will be estimated using the behavioral effective exchange rate model (BEER model). RER (real exchange rate) misalignment is observed through comparing the calculated RER (real exchange rate) and the estimated RER (real exchange rate) in the long run equilibrium. Using data from year 1993Q1 to 2010Q4, it can be observed the direction in which each main economic factors affecting RER (real exchange rate). The result reveals the RER (real exchange rate) misalignment; overvaluation in the period before 1997 Asian financial crisis and before US subprime crisis in 2008. These misalignments of RER (real exchange rate) correspond to the intervention from BOT. With RER (real exchange rate) misalignment, the impact on import/export sector plays vital role towards criteria of policy selection.