Degree of International Capital Mobility: The Model of Determination of Interest Rate

Abstract

     This study aimed to investigate factors affecting the determination of the interest rate, examine the level of international capital mobility, and measure the speed of adjusting interest rates in Thailand in accordance with the changes to interest rates in foreign countries. A comparison between two periods was conducted: the time during which Thailand used a fixed exchange rate, and the period of a floating exchange rate from the third quarter of 1990 to the first quarter of 2010. The results of multiple regression analysis revealed that all independent variables were significantly associated with the interest rate in Thailand and had correct signs. Thus, the interest rate in Thailand was positively related to the foreign interest rate, a prediction of exchange rate change, real national income, and the domestic interest rate in previous years, but it was negatively related to real money supply and a prediction of inflation rate. In addition, the level of international capital mobility decreased when the floating exchange rate was used. However, the level of capital mobility still approached a value of one while the value of the coefficient of adaptation was close to zero. This indicated that there was slow adjustment of the interest rate in Thailand as a result of the interest rate change in foreign countries. In the long run, carrying out the monetary policy of the central bank might be less efficient. Therefore, the central bank should monitor and make prudent and careful decisions on international capital mobility in relation to stability in the domestic economic system.