ABSTRACT
This chapter examines Thailand's exchange rate policy and its macroeconomic impacts. It provides a critical review of Thailand's exchange rate policy and describes lessons from past mistakes. The chapter also discusses capital controls and interventions in the foreign exchange markets. In addition to containing foreign exchange risk to promote international transactions, a fixed exchange rate can assure a steady output growth path. Capital account liberalization does not always lead to welfare improvement if financial infrastructure is not ready to cope with capital inflows. When Thailand embraced the International Monetary Fund’s capital account liberalization policy, borrowing in foreign currencies was encouraged. By June 1997, the real effective exchange rate (REER) of the baht appreciated more than the yen, the ringgit, the rupiah, and the Singapore dollar. The fixed exchange rate of the baht to the dollar did not reveal the erosion of Thailand's competitiveness as much as the REER.
