Dealing with Capital Flows: Thailand in 2006 Harvard Case Solution & Analysis

This case was written as a test case for the first year, the global economy and markets. It is written as a comprehensive case study policy decisions facing the small open economy in an increasingly globalized world. It can be used in the course of an open economy macroeconomics and international finance. Later the same day, December 18, 2006, the Bank of Thailand (BOT), the central bank announced that effective the next day he would impose a 30% unremunerated reserve requirement (URR) on short-term capital inflows. Control measures necessary capital financial institutions refuse to reserve 30% of capital inflows, which exceeded USD20, 000 for one year. Restrictions on the flow of capital is a significant escalation of the battle in Thailand to stop the appreciation of its official currency, the baht (THB). December 19 Stock Exchange of Thailand (SET) composite index fell by a record 14.84%, destroying THB800 billion or USD22 billion market capitalization. Sales affected regional stock markets, as well, with Jakarta (Indonesia) to 2.85%, Kuala Lumpur (Malaysia) by 2% and Singapore down 2.23%. In the currency market, the baht lost 2% of its value against the U.S. dollar to settle at about THB36 to the dollar. The large influx of foreign capital and, as a consequence satisfaction Thai Baht crowned the Provisional Government to introduce capital controls. Dramatic reaction in the financial markets, however, prompted the Thai politicians to reconsider the situation and to consider policy options for 2007.
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by Wei Li Source: Darden School of Business 12 pages. Publication Date: March 13, 2007. Prod. #: UV0765-PDF-ENG

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