We recall that we rejected weak exogeneity for the exchange rate in section 4 but we argued from its insigni...cant adjustment coe¢ cients � that the exchange rate will not be a normalizing variable in the subsequent identi...cation of the �. Our line of argumentation is consistent insofar because shocks to the exchange rate have permanent e¤ects on money, the in‡ation rate and the exchange rate itself. The e¤ect on in‡ation is positive whereas exchange rate shocks contract money holdings. In other words, the result might suggest that the central bank would counteract in‡ationary tendencies by contracting money following a depreciation.

# 7 Conclusion and Possible Extensions

We attempted to analyze monetary policy and the monetary transmission mechanism in the Thai economy based on a well-speci...ed cointegrated VAR approach. Our ...ndings reveal that any full sample modeling strategy that incorporates the Asian Crisis will be misspeci...ed, and policy inferences from such a model are potentially invalid. Our subsample-based modeling strategy is able to account for the e¤ects of the structural break and pinpoint the fundamental di¤erences in both the pre-crisis and post-crisis model.

Speci...cally, we ...nd that Thai monetary policy was potentially immobilized in the pre-crisis period by virtue of the pegged exchange rate regime and the ...nancial liberalization of the Thai economy. Many existing studies that investigate the monetary transmission mechanisms in Thailand do not take account of this fact and make assumptions of the monetary policy stance of the Thai central bank in this period. For example, Patrawimolpon et al (2001) assume that the central bank either targets money supply or the interest rate in their pre-crisis model. Such assumptions are potentially invalid insofar because they are at odds with the typical Mundell-Fleming type argument of the inconsistency of the trinity independent monetary policy, ...xed exchange rate regime and open capital account. Analogous to the above argumentation, we do not obtain an interest rate policy function.

Our two cointegrating vectors in the pre-crisis model correspond to an in‡ation adjustment equation and IS-type equation. Similarly to Bhanthumnavin (2002), we cannot obtain a Phillips Curve relationship. In‡ation seems foremost a monetary phenomenon and is positively related to the inverse velocity of money.

Our results for the pre-crisis monetary transmission mechanism are consistent with the identi...cation of the common stochastic trends. In details, money shocks have permanent e¤ects on in‡ation but only transitory e¤ects on output. The transitory response of output supports the reasoning of Corbett and Vines (1999) and Phongpaichit and Baker (2002) that the monetary tightening of the Thai central bank in 1993-4 to cool down the economy was ine¤ective because ...nancial intermediaries were able to borrow abroad at cheaper interest rates. Also, there is no channel from monetary shocks to the exchange rate which is economically intuitive. Shocks to the interest rates signi...cantly in‡uence output which we attributed to a possible ...nancial accelerator argument (Bernanke et al, 1996) or the fact that domestic interest rates move with foreign interest rates which were not included in the model.

In the post-crisis model, we do ...nd a money demand equation in which money supply is 20