Thailand has experienced huge capital inflows recently. After the financial liberalization - the relaxation of capital control in the second quarter of 1990, concerns that capital inflow influx into the country would limit the degree of monetary policy effectiveness arose. The concept was proposed by the Hypothesis of Offsetting Capital Flows which is valid in many countries. The Hypothesis states that an attempt of monetary authority of a small country pursuing a fixed exchange rate systems to change and control money supply will not succeed. An increase in the net domestic asset of the central bank will result in a capital outflow and vice versa. The scenario motivates the investigation of what happens to Thailands monetary policy effectiveness, how bank of Thailand, the Thai central bank, reacts to such a huge capital inflow and how sensitive or how fast domestic interest rates adjust to movements of foreign interest rates. In this thesis, Ordinary Least Squares Regression on total capital flows in the context of Hypothesis of Offsetting Capital Flows is used to test the monetary policy effectiveness. Reaction function of Bank of Thailand is estimated to represent the central bank behavior against capital inflows. Foreign interest rate elasticity of domestic interest rate is used to test the sensitivity of domestic interest rate adjustment. The period of study starts from 1981 to 1993. Our findings show that the Hypothesis is supported in the long run in the case of Thailand but not in subperiods before and after financial liberalization. A capital inflows induced Bank of Thailand to reduce its net domestic asset prior the financial liberalization period in 1990. After financial liberalization no significant of such sterilization policy is found. It is more oriented towards market mechanism. While domestic interest rates are drastically sensitive to changes in foreign interest rates right after the relaxation of capital control, after that short period the sensitivity moves back in to normal range.