||LR ex|clusion|Stationarity|Weak exogeneity|
|---|---|---|---|---|
||Statis|tic is �<sup>2</sup>(2)|Statistic is �<sup>2</sup>(4)|Statistic is �<sup>2</sup>(2)|
|RM1|8:49|(0:01)|33:55 (0:00)|6:12<br>(0:05)|
|LMPI|8:66|(0:01)|35:48 (0:00)|12:01 (0:00)|
|DLCPI|41:94|(0:00)|7:40<br>(0:12)|41:15 (0:00)|
|RP|0:70|(0:70)|22:65 (0:00)|2:74<br>(0:25)|
|LEXCH|7:66|(0:02)|31:15 (0:00)|0:61<br>(0:74)|
|Trend|10:87|(0:00)|||

Table 3: Tests of simple hypotheses on � and <u>�</u> for r = 2 <u>(p-values)</u> Firstly, we conduct the null hypothesis that any given endogenous variable can be excluded from the two steady state relationships. We cannot reject long-run exclusion for RP with a p-value of 0.70 so the interest rate should not enter the cointegrating space. We have to be cautious because from the � matrix the interest rate is signi...cantly equilibrium correcting and also RP might be slightly collinear with output and the exchange rate so potentially biasing the results. The test for long-run exclusion further suggests that real money RM 1, output LMPI, the monthly in‡ation rate DLCPI and the exchange rate LEXCH are potentially ’endogenous’variables so this is a guidance in subsequently identifying the two cointegrating relationships.

Secondly, a test for stationarity without including the restricted trend is negative for all system variables except the in‡ation rate DLCPI with a p-value of 0.12. Thirdly, we conduct some weak exogeneity tests. Weak exogeneity refers to the situation when a variable can in‡uence the steadystate path of the remaining variables in the system but is completely invariant to the equilibrium errors of these variables. In other words, there is no level feedback to the weakly exogenous variables. The results of the tests indicate that the null hypothesis of weak exogeneity cannot be rejected for RM 1, RP and LEXCH. In addition, a joint weak exogeneity test is accepted with a p-value of 0.05.

There is no level feedback to money, and shocks to money are permanent and not transitory. It appears that the Bank of Thailand had di¢ culty in controlling money in the pre-crisis period. Hence, we can observe scenarios where the money supply is determined by market forces, and the central bank had only limited scope to control in‡ation. Such a conclusion is tentative and subject to our model validity.<sup>15</sup> Besides real money, both the cumulated residuals of the interest rate and the exchange rate are common stochastic trends in our system. The result for the exchange rate is not surprising because it has been ...xed for the complete sample period. Hence, the exchange rate is not determined endogenously within the system. By the fact that the interest rate is weakly exogenous, we are unable to recoup any type of interest rate policy function such as a Taylor rule type. These results are robust to replacing the 14-days repurchase rate with the alternative interest rate measure of the money market rate.<sup>16</sup>

> 15 For instance, our model is a small scale macroeconomic model so does not fully replicate real world phenomena. The results are robust to using M2 instead of narrow money M1. But the ...ndings could not be invariant to a very broad measure such as M4, even though Thai researchers predominantly adopt either the M1 or M2 measure. Also, the fact that RM 1 is weakly exogenous does not imply that nominal money is weakly exogenous and uncontrollable. But we also estimate a model with nominal money instead and do ...nd that nominal money is weakly exogenous, therefore providing some robustness for our above argumentation.

> 16 Both the 14-days repurchase rate and the money market rate have a very high correlation of over 0.90 over the

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