THE PRICE OF DEBT: MONETARY-FISCAL POLICY COORDINATION AND CAPITAL ACCUMULATION UNDER INSTITUTIONAL CONSTRAINTS IN THAILAND

Abstract

This study examines the dynamic relationships among public debt, monetary policy, and capital accumulation in Thailand from 2005 to 2025. Using a Vector Error Correction Model (VECM), Impulse Response Functions (IRFs), and Forecast Error Variance Decomposition (FEVD), the analysis distinguishes short-run adjustments from long-run relationships. The results indicate that public debt is associated with a temporary increase in aggregate fixed capital formation in the short run, while the long-run relationship is consistent with a crowding-out mechanism. Monetary tightening is associated with lower capital formation and higher public debt over time. FEVD results show that public debt and policy-rate shocks jointly account for approximately 35% of the variation in aggregate fixed capital formation over a 12-quarter horizon. These findings highlight the importance of debt dynamics and monetary-fiscal interactions for capital accumulation in a small open emerging economy.