Analyzing the Appropriate Policy Interest Rate of the Bank of the Lao PDR

Abstract

In a study on the topic of analyzing the appropriate base interest rate of the Bank of the Lao PDR, into two objectives: to study the trends of the base interest rate, and to analyze the appropriate base interest rate using Taylor’s Rule model and to estimate the base interest rate of the Bank of the Lao PDR using the Lingo programming software, using data from 2006-2025 for a total period of 240 months. The study found that: between 2006 and 2025, the benchmark interest rate of the Bank of the Lao PDR (BOL) ranged from a minimum of 3% to a maximum of 20%. Regarding inflation during the same period, the lowest inflation rate was approximately -0.03%, while the highest was in 2023 at 41.26%. Concerning the money supply M2, in 2006, M2 was approximately 5,386.26 billion LAK, and it continuously expanded until 2025, reaching 297,000.00 billion LAK. The Gross Domestic Product (GDP) from 2006 to 2025 showed an increasing trend, with the lowest growth rate at 3.3% and the highest at 8.3%. Regarding the exchange rate, in 2006 the buy-sell rate was around 10,171.1 LAK/USD. During the period 2008-2013, the Lao Kip remained highly stable under the managed peg exchange rate regime. In 2021, the exchange rate was 9,745.33 LAK/USD and 338.66 LAK/THB. In 2023, the Kip continued to depreciate, with the exchange rate reaching 18,717.82 LAK/USD and 560.95 LAK/THB. For 2024-2025, the rates were 21,564.19 LAK/USD, 654.38 LAK/THB to 21,533.98 LAK/USD, and 651.23 LAK/THB. The results of the long-run relationship test indicate that the inflation rate, the money supply M2, and the exchange rate of the US dollar have a positive relationship with the base interest rate of the BOL at a 99% statistical confidence level. The variables of the output gap and the exchange rate of the US dollar have an inverse relationship with the base interest rate of the BOL at a 99% statistical confidence level. When including the Thai Baht exchange rate variable, the appropriate rate is estimated at 8.46% and the US Dollar exchange rate variable, the appropriate rate is estimated at 6.44%