Among them, Chowdhury (1997) ...nds in a cointegrating VAR that includes M1, output, prices, exchange rate and a measure of the foreign interest rate, two cointegrating vectors. Further, Masih and Masih (1996) reach similar results for a di¤erent sample period and frequency of observations. Hence, we can embed long-run relationships into the analysis of Thai monetary policy and the monetary transmission mechanism without having to assume speci...c forms of money demand functions and other macroeconomic relationships such as a monetary policy rule or in‡ation adjustment equation. This approach is promising because once we have identi...ed the cointegrating vectors, we can ...x them at their estimated values and treat them as predetermined stationary variables in the ensuing identi...cation of the short run structure. In addition, the cointegration methodology will allow us to explicitly account for the permanent and transitory driving forces in the model by modelling the common stochastic trends in order to get some insights into the Thai monetary transmission mechanism. Lastly, the de...ciencies of the above-mentioned structural VARs to the Thai economy o¤er room for improvement such as use of dummy variables, sample period selection, adequate model speci...cation and invariance to the structural break by subsampling.

In terms of our modelling strategy, similar cointegrated VAR studies have been undertaken by Juselius (1996) and Beyer (1999) for the case of Germany. For example, Juselius (1996) obtains two di¤erent monetary policy regimes for her sample period. In a related vein, Doornik et al (1996), Pesaran and Smith (1998) and Juselius (2007) provide the underlying theoretical framework for our study of the Thai monetary transmission mechanism.

# 3 Overview of the Thai Economy and Data

In general, the monetary policy framework in Thailand in the last twenty years can be characterized by a basket approach in the pegged exchange rate regime from 1984- June 1997, a monetary targeting regime from July 1997- May 2000 and an in‡ation targeting regime until today.

Phongpaichit and Baker (2002) provide a thorough overview of the macroeconomic developments in Thailand over the last two decades. Following the abandonment of Thailand’s import substitution strategy in the mid-1980s, Thailand’s macroeconomic framework was characterized by a ...xed exchange rate regime as the nominal anchor and tight ...scal policy to pave the way for the export boom.

Many international companies from East Asia set up production facilities in Thailand especially in electrical and automotive industries. The export boom resulted in a tight labour market, increased foreign competition and a negative current account in the early 1990s. The problem was that at the same time, Thailand liberalized its ...nancial markets so that Thailand’s inherent problems were overshadowed insofar as its economy continued to grow, partly due to high volumes of bank lending. During this period monetary policy was immobilized through the exchange rate peg and the ...nancial liberalization.

A year before the crisis, Thailand su¤ered an export slowdown that resulted from decreasing demand from Japan, accelerated competition from China and higher labor costs. Warr (1998) provides a taxonomy of the boom and bust arguing that the investment boom in combination 5