International Finance Course project - Essay Example

This write-up will look into among other things, the motivation behind the introduction of the URR, Impact of URR provision on the exchange rate of Thai Baht, impact of URR on Thai financial markets and finally impact of URR on neighboring financial markets such as Malaysia, Philippine, Singapore and Korea. Motivation behind introducing the URR provision The motivation, according to the Ministry of Foreign Affairs, Kingdom of Thailand (2008) was the need to “deter short-term capital inflows.

” Simply put, the Unremunerated Reserve Requirement was motivated by the need to discourage people; particularly investors from undertaking short-term investments that only bring about short-term capital inflows. The Deardorffs' Glossary of International Economics (2010) notes that short-term capital flows are “of interest because such capital flows are likely to be very liquid and therefore easily reversed and sources of instability in exchange markets.” This is to say that the Thai government was motivated by the need to ensure that investments undertaken in the country through the country's banks and other financial institution were going to be long-term and trustworthy for solid future benefits.

This is because short-term investments hardly yield any fruitful benefits for the growth of the country's economy. Impact of URR provision on the exchange rate of Thai Baht with other major currencies such as US$ and local currencies The Unremunerated Reserve Requirement is believed to impact on the exchange rate of the Thai Baht by ensuring stability and growth of the currency as against other major currencies. This is because as the Ministry of Foreign Affairs, Kingdom of Thailand, (2008) notes, the URR will lessen the pressure of Baht speculation rather become instrumental in “ensuring the Baht stability and its movement more in line with regional currencies.

” Such stability against major currencies is assured because there would no longer be extreme volatility of the Thai Baht: a situation that causes long term economic instability (Ministry of Foreign Affairs, Kingdom of Thailand, 2008). The stability of the currency would also be achieved because the Bank of Thailand will “buy up the incoming dollars and other major currencies” (Bangkok Post, 2010). As a matter of fact, the growth of the currency of any country is of prime interest to the economic and finance planners of that country.

This is because with the growth of a particular country's currency, investors and business personnels in that country are put in a better position to competing in global and international trade without fear of rampant foreign exchange rates. The government on the whole also benefits because it is put in a better position to compete globally and economic growth and stability is assured. For instance with a very stable currency, the government is not put in a position where it has to spend so much local currency in a bid to undertake foreign trade because of the weak value of the government's trading currency.

It is against this background that the government introduced the Unremunerated Reserve Requirement. In two Graphs below represents the monthly exchange rate for the years 2005 when the URR was not in force and 2011 after the URR had been in force. Figure 1: 2005 Average Monthly Exchange Rate for US Dollar Against the Thai Baht from January to