Government Subsidization and Price Rigidity in Thailand's Concentrated Latex Industry

Government subsidization is a crucial instrument used by governments to encourage output, employment, and income. However, the effectiveness of this instrument depends on the economic characteristics in which price rigidity comes into play. This study integrates subsidization and price rigidity into the model to analyze the concentrated latex industry. The objective of this model is to investigate their effects on the variation in key variables, particularly output, price, and employment. The Dynamic Stochastic General Equilibrium (DSGE) approach was utilized in the model formulation, and a Bayesian estimation method was employed to estimate some parameters. The monthly data used for model estimation were derived from the Office of Industrial Economics database, which included data on domestic price, demand, and export of concentrated latex in the period between January 2016 and January 2022. The results from the simulation suggest that when the industry complied with price rigidity, the sensitivity of the variables was more limited compared to the flexible price one. This can be observed after applying shocks to the industry, particularly to productivity, government subsidization, and exchange rate shocks. Therefore, it is recommended that in an economy that becomes more liberal, enabling producers to access information and technologies, policymakers should design strategies and policies that correspond with a flexible environment to prevent negative results and achieve a stable target.