MONETARY AND FINANCIAL THEORIES 2 topic relationship between monetary policy and fiscal policy from theories to reality in vietnam

NATIONAL ECONOMICS UNIVERSITY ADVANCED EDUCATION PROGRAMS MONETARY AND FINANCIAL THEORIES Topic: Relationship between monetary policy and fiscal policy: From theories to reality in Vietnam Group: A Class: Corporate Finance AEP 61A Teacher: Pham Thi Thuy Dung Ha Noi, 2021 GROUP MEMBERS AND TASKS Group Full name Tasks receipt Assessment Khổng Thị Kim Liên (11192723) Nguyễn Thanh Huyền (11192468) Nguyễn Hồng Nhung (11194047) Nguyễn Hồng Ngọc (1113795) Nguyễn Hương Quỳnh (11194476) Nguyễn Thu Trang (11195370) Leader _ Information Collecting Part + Slide making 100% Information Collecting Part + Presenter 100% Information Collecting Part + Writing Report 100% Information Collecting Part + Introduction + Conclusion 100% Information Collecting Part + Slide making 100% Information Collecting Part + Presenter 100% TABLE OF CONTENTS GROUP MEMBERS AND TASKS INTRODUCTION I OVERVIEW OF MONETARY POLICY AND FISCAL POLICY 1.1 MONETARY POLICY 1.2 FISCAL POLICY II RELATIONSHIP BETWEEN MONETARY POLICY AND 10 FISCAL POLICY 10 2.1 COORDINATION OF MONETARY POLICY AND FISCAL POLICY 10 2.2 THE INTERACTION RELATIONSHIP BETWEEN MONETARY AND FISCAL POLICY IN THE IMPLEMENTATION OF MACROECONOMIC OBJECTIVES 10 2.3 THE IMPACT OF FISCAL POLICY ON MONETARY POLICY 12 2.4 THE IMPACT OF MONETARY POLICY ON FISCAL POLICY 14 III RELATIONSHIP BETWEEN MONETARY POLICY AND FISCAL POLICY IN VIETNAM DURING COVID-19 PANDEMIC 14 3.1 FINANCIAL MARKER IN SITUATION IN THE CONTEXT OF 14 COVID-19 14 3.2 WHAT THE GOVERNMENT HAS DONE TO ACHIEVE POSITIVE RESULTS 16 3.3 GENERAL EVALUATION AND OBJECTIVES OF MONETARY AND FISCAL POLICY IN VIETNAM DURING COVID-19 PANDEMIC 17 CONCLUSION 20 REFERENCES 21 INTRODUCTION Along with international financial integration, the abnormal fluctuations in the financial market also become more and more complicated, the potential risks in the financial market therefore also become unpredictable, requiring countries to increase control over financial markets Controlling the financial market can be through the creation of a strict legal framework to prevent negative impacts from the unexpected behavior of actors in the financial market macro-policy tools to control financial transactions and forecast negative trends in the future to have appropriate hedging solutions The subject of this article is mainly about: “Relationship between monetary policy and fiscal policy: From theories to reality in Vietnam” We focus on studying the relationship of fiscal policy and monetary policy and analysing their functions in controlling the safety of financial markets and policy recommendations for Vietnam, especially during Covid – 19 pandemic I OVERVIEW OF MONETARY POLICY AND FISCAL POLICY 1.1 MONETARY POLICY Monetary policy is a set of tools that a nation's central bank has available to promote sustainable economic growth by controlling the overall supply of money that is available to the nation's banks, its consumers, and its businesses The goal is to keep the economy humming along at a rate that is neither too hot nor too cold The central bank may force up interest rates on borrowing in order to discourage spending or force down interest rates to inspire more borrowing and spending The main weapon at its disposal is the nation's money The central bank sets the rates it charges to loan money to the nation's banks When it raises or lowers its rates, all financial institutions tweak the rates they charge all of their customers, from big businesses borrowing for major projects to home buyers applying for mortgages All of those customers are rate-sensitive They're more likely to borrow when rates are low and put off borrowing when rates are high 1.1.1 Types of Monetary Policy Broadly speaking, monetary policies can be categorized as either expansionary or contractionary: (i) Expansionary Monetary Policy In macroeconomics, expansionary monetary policy is used when the central bank injects money into the market, expands the money supply more than usual which causes interest rates to fall, thereby increasing spending demand, creating more jobs, doing more to meet the quantity of goods, leading to the promotion of financial investment and expansion of production and business ways for central banks to conduct expansionary monetary policy: Lower the reserve requirement ratio; Lower the discount rate for commercial banks; Buy stocks In macroeconomics, expansionary monetary policy is used in the context of a recession and an increase in unemployment (ii) Contractionary Monetary Policy In macroeconomics, tight monetary policy will be the opposite of expansion, which is the move of the central bank to reduce the money supply in the market, leading to an increase in bank interest rates, thereby narrowing the demand for money, spending and commodity prices fall Contractionary monetary policy is used by the government when the economy is overheated, inflation is increasing and used to fight inflation ways central banks implement contractionary monetary policy: Increase the required reserve ratio; Increase discount rates, control credit activities; Sell securities Based on the economic situation of a country that is growing excessively or slowly; inflation is high or under control; unemployment rate; good or bad credit; market liquidity…then the government will choose to use tight or contractionary monetary policy 1.1.2 Roles of Monetary Policy In macroeconomics, monetary policy plays a very important role in regulating the amount of money circulating in the market Thanks to monetary policy, the central bank can control a country's currency; effective support in controlling inflation, stabilizing the purchasing power of the market and promoting economic growth More specific: (i) Economic growth Economic growth is the first and most important goal when implementing monetary policy in each country In particular, the two main factors that represent the economic growth of a country are expressed through two factors, namely Interest Rate and General Demand because these two indicators are the biggest factors affecting the increase in investment, production, and gross national product (ii) Control the unemployment rate When applying the monetary policy, it will directly affect the effective use of social resources, the scale of production and business, and the creation or reduction of jobs That is, to reduce the unemployment rate, the economy must accept a certain rate of inflation (iii) Stable price in the market Stabilizing prices in the market helps the government to plan the most sustainable economic development policy because it has eliminated the fluctuation of prices The balance between the amount of money and the quantity of goods will help stabilize prices, thereby creating a less volatile investment environment, attracting investment capital, promoting domestic and foreign enterprises to produce and bring profits to the market (iv) Stable interest rates When the main interest rate (also known as the prime interest rate) is stable, credit interest rates from commercial banks will also be less volatile As a result, lending and investment funds created from deposits in the society will have a more flexible interest rate system in line with market fluctuations (v) Stabilizing foreign exchange and financial markets Monetary policy has a great role in stabilizing financial markets, so that the government can make more accurate decisions in promoting economic growth The stable foreign exchange market will contribute to strengthening the confidence of foreign companies because the exchange rate policy is the first condition for these organizations to decide to invest in a certain country 1.1.3 Tools to implement Monetary Policy Central banks use a number of tools to shape and implement monetary policy: First is the buying and selling of short-term bonds on the open market using newly created bank reserves This is known as open market operations Open market operations target short-term interest rates such as the federal funds rate The central bank adds money into the banking system by buying assets—or removes it by selling assets—and banks respond by loaning the money more easily at lower rates—or more dearly, at higher rates— until the central bank's interest rate target is met Open market operations can also target specific increases in the money supply to get banks to loan funds more easily by purchasing a specified quantity of assets This is the process known as quantitative easing (QE) The second option is to change the interest rates or the required collateral that the central bank demands for emergency direct loans to banks in its role as lender-of-lastresort In the U.S This rate is known as the discount rate Banks will loan more freely or less freely depending on this interest rate Authorities also can manipulate the reserve requirements These are the funds that banks must retain as a proportion of the deposits made by their customers in order to ensure that they are able to meet their liabilities Lowering this reserve requirement releases more capital for the banks to offer loans or to buy other assets Increasing it curtails bank lending and slows growth Unconventional monetary policy has also gained popularity in recent times During periods of extreme economic turmoil, such as the financial crisis of 2008, the U.S Fed loaded its balance sheet with trillions of dollars in treasury notes and mortgage-backed security (MBS), introducing new lending and asset-purchase programs that combined aspects of discount lending, open market operations, and QE Monetary authorities of other leading economies across the globe followed suit Central banks have a powerful tool in their ability to shape market expectations by their public announcements about possible future policies Central bank statements and policy announcements move markets, and investors who guess right about what the central banks will can profit handsomely 1.2 1.2.1 FISCAL POLICY Definition Fiscal policy refers to the use of government spending and tax policies to influence economic conditions, especially macroeconomic conditions, including aggregate demand for goods and services, employment, inflation, and economic growth Fiscal policy is often contrasted with monetary policy, which is enacted by central bankers and not elected government officials 1.2.2 Roles of Fiscal Policy (i) Price Levels The fiscal policy ensures an attractive price level in a country Consequently, this implies that the costs and prices reach a level where employment and production are maximized (ii) Controlling Inflation When expenditures of non-productive projects are lowered, or taxes are raised, the demand for goods and services decreases As a result, fiscal policy acts as a significant inflation rate control alternative (iii) Encouraging Investments Providing a conducive environment for businesses and consumers, for instance, by reducing taxes, encourages investments This moves capital from less productive to more productive sectors, consequently enabling a country’s resources to be fully utilized (iv) Reducing the Regional Disparities In most emerging economies, some provinces or states experience more development than others It is, therefore, the responsibility of the government to initiate the infrastructural development of the underdeveloped areas Also, the government might provide less developed areas with tax breaks to boost the per capita income (v) Increasing Industrial and/or Agriculture Output Fiscal policy can influence certain sectors of the economy in direct or indirect ways For example, some policies have a direct impact on the value of land in the agricultural sector Also, the agricultural sector is very capital-intensive A good fiscal policy can affect the relative demand and competitiveness of exports for agricultural products Therefore, fiscal policy can be used to increase the output of some sectors of the economy (vi) Controlling Consumption A country cannot improve its economic position without increasing investments If the consumption rate rises too rapidly, then savings and investments automatically drop Therefore, the fiscal policy comes in and plays a supervisory role over the consumption rate (vii) Ensuring Equal Distribution of Resources The purchasing power increases with a fair distribution of resources among different classes of society This leads to high levels of production, which lowers the unemployment level 1.2.3 Tools to implement Fiscal Policy The government possesses two major fiscal tools for influencing the economy These tools can be divided into spending tools and revenue tools Spending tools refer to the overall government spending On the other hand, revenue tools refer to taxes collected by the government (i) Government Spending Tools Capital Expenditure Capital expenditure refers to what a government spends on amenities such as schools, roads, and hospitals This spending adds to a country’s capital stock Besides, it affects the productivity of a country Moreover, as the government increases its spending on such facilities, it increases the capital stock of the country Since such facilities highly encourage investment, the total productivity of a country also increases due to an increase in investments Current Government Spending Current government spending includes goods and services, which it regularly provides Such services include defense, health, and education This expenditure aims at improving a country’s labor productivity Transfer Payments Transfer payments are payments that the government makes through the social security systems Transfer payments ensure a minimum level of income for low-income individuals Also, they provide ways in which the government can change the distribution of income in society Therefore, they comprise unemployment and child benefits Such benefits also include state pensions, housing benefits, income support, and tax credits It should be stated that such payments are not included in the calculation of the GDP because they are not attached to any factor of production (ii) Government Revenue Tools Indirect Taxes Indirect taxes refer to taxes imposed on specific goods such as cigarettes, alcohol, fuel and services VAT is an example of an indirect tax Health and education can be excluded from indirect taxes Direct Taxes Levies on profit, income, and wealth are direct taxes Taxes charged on deceased property can both raise revenue and distribute wealth They include capital gains taxes, national insurance taxes, and other corporate taxes II RELATIONSHIP BETWEEN MONETARY POLICY AND FISCAL POLICY 2.1 CO OR DINATION OF MONETARY POLICY AND FISCAL POLICY Monetary policy and fiscal policy form an important policy system in the macroeconomic, the tools of these two policies are both independent, but interactive, support each other in the macroeconomics The good coordination and smooth operation of these two policies will help the executive government achieve two important macroeconomic objectives: growth and inflation control On the contrary, in-rhythmic, non-cohesive coordination will reduce policygoverning effectiveness and may even exacerbate macroeconomic instability Therefore, finding a mechanism for coordination between these two policies is always of interest to the government and policy makers 2.2 THE INTERACTION RELATIONSHIP BETWEEN MONETARY AND FISCAL POLICY IN THE IMPLEMENTATION OF MACROECONOMIC OBJECTIVES Fiscal policy in the implementation of macroeconomic objectives Although each policy, whether monetary policy and fiscal policy, uses a system of different tools: fiscal policyuses tax instruments, budget spending and government borrowing; monetary policy uses a market-based indirect tool system, but in the end both policies aim to achieve the following macro goals: 2.2.1 Development financial market Both finance ministries and central banks have a strong interest in financial market development because (1) it is indispensable for economic development and growth; (2) it 10 facilitates funding of deficits and debt; and (3) it enables market-based operations by central banks As part of financial market development, it is important for the authorities to engage in a discussion with (potential) market participants about market practices, conditions, and possible impediments The relationship between monetary and fiscal policy depends strongly on the development of financial markets The transition from a rudimentary financial system to a fully developed system can be divided into four stages In the undeveloped stage, there is no government debt outside the central bank, and fiscal deficits are essentially accommodated by money creation In the next stage, marketable securities are introduced, but there is no secondary market and interest rates are inflexible In the transitional stage, a secondary market for government debt instruments exists, interest rates have become more flexible, and central banks conduct more active and independent liquidity management In the final developed stage, medium-term debt instruments are offered through auctions, interest rates are fully flexible, and central banks control liquidity in the markets through indirect and market-based instruments (e.g., repos) In particular, in the latter two stages, good coordination between the government’s financial management (issuance of treasury bills, etc.) and the central bank’s monetary policy operations is required They implement many measures to manage prices, ensuring the stability of production and business costs as well as stabilizing consumer sentiment A number of solutions to manage prices have been implemented drastically, in flexible coordination with fiscal and monetary policies have helped the general supply and demand stabilize, less scarcity and create stability for vietnam's macroeconomic foundation 2.2.2 Inflation stability Fiscal and monetary policy have been closely coordinated in the management of state funds Concrete: Deposit transfer activities of the State Treasury, under the Ministry of Finance, at Credit institutions on the State Bank help the State Treasury improve the efficiency of treasury management, while improving the capacity to manage cash flow Base on here, State Bank is better forecasts the liquidity status of the credit institution system to have a proactive monetary regulatory base through flexible operation of open market operations Since then, it has stabilized the currency market, foreign exchange, inflation control The State Bank must calculate difficulties when the difference between interest rates and inflation rates is not much Because: Inflation by law is Lower than the deposit interest rate, the deposit interest rate must be lower than the lending interest rate Specifically: If the inflation rate is higher than the interest rate on deposits depositing money into banks, it will be useless when the currency depreciated faster than the interest rate enjoyed Lead 11 to people use the money to spend on goods and services, store gold or real estate speculation to ensure the purchasing power of the currency This increases the amount of money in circulation, leading to increased inflation and bad effects on the economy Therefore if interest rates and inflation rates are equal, the situation will also develop similarly but at a slower pace 2.2.3 Employment and income The Ministry of Finance, on the one hand, continues to implement comprehensive solutions to support people and businesses facing difficulties due to the Covid-19 pandemic, submits to the Government for promulgation of decrees on tax exemption, reduction, extension of tax and land rent , fees and charges On the other hand, tightening financial and state budget discipline, saving recurrent expenditures, cutting unnecessary expenditures, slow implementation of spending tasks, especially the review and reduction of compliance with regulations All non-business expenses of investment nature are thoroughly understood and strictly implemented It can be said that there is a close relationship between the monetary policy and the monetary policy To ensure the realization of the macroeconomic indicators of an economy, these two policies cannot be separated, because many macroeconomic indicators will not be possible without the combination adjustment of these two policies 2.3 THE IMPACT OF FISCAL PO LICY ON MONETARY POLICY In principle, fiscal policy can affect Monetary policy through direct impact and indirect impact: 2.3.1 Direct impact Fiscal policy can impact Monetary policy through: Expanded Fiscal policy leads to budget deficit, pushing the Government to require the SBV to advance to fund the budget deficit – i.e the expanded fiscal policy has inadvertently promoted the Monetary policy as well It must be expanded, increasing the risk of inflation and will also make it difficult for the balance of payments There is another, more direct channel of fiscal policy affecting monetary policy and that is the impact of indirect taxes on the price level and thus on inflation If governments feel forced to resort to substantial increases in indirect taxes—sales taxes, value added taxes—rather than taxes on various forms of income, this will have a direct impact on 12 prices The key concern here is that a one-off increase leads to a wage-price spiral and therefore permanent (higher) inflation and inflationary expectations 2.3.2 Indirect impact Fiscal policy can impact monetary policy through an impact on market expectations In the event that budget has a deficit but the Government does not ask the central bank to make up the deficit, which the Government borrows in the domestic market, such borrowing will also cause concerns about the effect of "draining capital" and the impact of raising interest rates in the market This, in turn, has a negative impact on the central bank and makes it difficult to implement the central bank's monetary policy goals In the event that the Government increases foreign borrowing, it will affect the international balance of payments and the central bank's exchange rate policy will be affected through investors' expectations about the change of market rate Impact of Fiscal Expansion: Conceivably, expansionary fiscal policy may at some stage become ineffective as a means to stimulate demand and, similarly, fiscal contractions may turn out to be expansionary.1 When economic agents realize that the government is borrowing too much for its own good, they will conclude that this can only lead to higher taxation levels in the future, and they may decide to compensate for that already now by saving more and consuming less This so-called “Ricardian equivalence” means that the financial behavior of economic agents—on which central banks base their monetary policy decisions—depends on their perception of fiscal sustainability It is therefore another example of how fiscal policy can (indirectly) affect the effectiveness of monetary policy It should be noted that the impact of fiscal policy on central bank objectives is not automatically avoided when the central bank is independent Even when the central bank has independence, and hence is not submitted to the fiscal needs of the government, the need to offset the impact of expansionary fiscal policy on aggregate demand and inflation in the economy could prompt the central bank to tighten monetary policy, by raising interest rates or reducing credit in the financial system The resulting high interest rates could depress economic activity, attract short-term and easily reversible capital inflows— thereby adding to inflation and appreciation pressures on the currency, and eventually damaging macroeconomic and financial stability Severe budgetary problems may even lead to crises There have been a number of examples of such severe tensions in the past, in which large and growing fiscal deficits—in the absence of needed public sector reforms—led to high real interest rates This intensified the government’s debt-servicing costs, causing a buildup of short term and foreign currency-linked public debt, thus increasing the sensitivity to interest rate, exchange rate, and rollover risks, which materialized as foreign capital inflows that had helped to finance the debt were suddenly reversed Examples of this set of circumstances were apparent in the run up to the crises in Turkey (1994, 2001), Mexico (1994), Russia (1998), Brazil (1999), and Argentina (2001) 13 Even in countries where such extreme conditions did not materialize, the sustainability of the monetary regimes can be challenged by fiscal policies that are too accommodating This has happened in the past in, for example, Israel and Poland where expansionary fiscal policy caused an overheating of the economy, reviving inflationary pressures and worsening the current account High interest rates— required to contain inflation— attracted capital inflows that complicated the implementation of monetary policy Sterilization of capital inflows to keep inflation under check became increasingly difficult and costly for the central bank 2.4 THE IMPACT OF MONETARY POLICY ON FISCAL POLICY (i) (ii) (iii) If the Central Bank implements a contractionary monetary policy, it will reduce investment, then reduce revenues for the Budget from taxes; A policy that devalues the local currency shall increase the size of the Government's foreign debt; If the Central Bank adjusts the interest rate increase, it will reduce the price of bonds, affecting the government's ability to balance the budget In Conclusion, the lack of effective coordination between monetary policy and fiscal policy can lead to financial instability which manifests itself as strong fluctuations in interest rates, exchange rates, inflation levels and thus destroying the foundation of economic growth From these analyses, it can be concluded that the combination of fiscal and monetary policy is very important to ensure that policies are p ut in place synchronously, contributing to the implementation of macroeconomic indicators III RELATIONSHIP BETWEEN MONETARY POLICY AND FISCAL POLICY IN VIETNAM DURING COVID-19 PANDEMIC 3.1 FINANCIAL MARKER IN S ITUATION IN THE CONTEXT OF COVID-19 During the Covid-19 outbreak, economic indicators showed that they were not really effective: 3.1.1 State budget In 2021, according to the most recent data of the Ministry of Finance, the revenue in months of 2021, the budget revenue of the house is estimated at VND 1,004.2 trillion, equal to 74.8% of the estimate, an increase of 14.3% over the same period in 2020 It is forecasted 14 that the state budget balance revenue in 2021 will only reach about 96%-98% of the yearend estimate, of which domestic revenue from taxes and fees is estimated to reach only about 92%-94% of the estimate 3.1.2 GDP In 2021, under the negative impact of the Covid-19 pandemic, it is not outside of the general trend of the world Gross domestic product (GDP) in the third quarter of 2021 was estimated to decrease by 6.17% over the same period last year, the deepest decline since Vietnam announced quarterly GDP so far Source: General Statistics Office of Vietnam 3.1.3 Inflation By the end of the first quarter of 2020, the general inflation index reached 5.6%, higher than 4.9% of the same period in 2019 Core inflation was also recorded at 3.1% - the highest level in the past years (GSO, 2020b) 15 In addition, core inflation in March 2021 decreased by 0.12% compared to the previous month and increased by 0.73% over the same period last year Average core inflation in the first quarter of 2021 increased by 0.67% over the same period last year 3.1.4 Unemployment According to the General Statistics Office of Vietnam, due to the negative impact of the COVID-19 epidemic, in the first quarter of 2021, the unemployment rate and underemployment increased to 2.42% However, thanks to the synchronous, flexible and effective coordination between fiscal and monetary policies, the situation still has bright spots The macroeconomic foundation is stable, the large balances are still secured, inflation is low The currency market, stable exchange rate, smooth liquidity, budget revenue reached more than 80%, contributing to ensuring revenue and expenditure for epidemic prevention and control and social security Agricultural production remains a bright spot, import and export growth is quite good; FDI investment remains in place Total demand rose slightly again but more monitoring must be followed 3.2 WHAT THE GOVERNM ENT HAS DONE TO ACHIEVE POSITIVE RESULTS First, in inflation control: The State Bank and the Ministry of Finance are two active participants in the National Monetary and Financial Policy Advisory Council and the Price Management Steering Committee; regularly exchange information, reports on analysis, evaluation and forecast of macroeconomic developments, prices, world and domestic inflation in time to advise and propose to the Government, the Prime Minister and the Steering Committee on price management solutions combining monetary and fiscal policy management in the process of adjusting prices of home items the country manages, contributing to controlling inflation below the target of 4%, ensuring a good macro balance of the economy Second, in the direction of monetary administration and regulation: the State Bank operates flexible monetary policy instruments to maintain reasonable liquidity for the credit institution system In 2020, 03 reductions in the interest rate of offering to buy valuable papers (total reduction of 1.5% per year), thereby contributing to reducing the market 16 interest rate, creating favorable conditions for the credit institution system to continue buying government bonds; supporting interest rate reduction for government bond issuances, ensuring the volume of capital mobilization and savings for the state budget Third, in the management of state funds: the State bank regularly exchanges and coordinates with the Ministry of Finance in transferring deposits of the State Treasury at credit institutions to state banks This activity supports the State Treasury to improve the efficiency of treasury management while improving the capacity of cash flow management; at the same time, it also supports the State Bank to better forecast the liquidity status of the credit institution system to have a proactive monetary regulation basis through the flexible operation of open market operations, thereby contributing to stabilizing the currency market, thereby contributing to stabilizing the currency market, foreign exchange, inflation control Fourth, promoting the development of financial and monetary markets: The State Bank and the Ministry of Finance regularly coordinate closely in setting out and implementing solutions to develop financial and monetary market segments The State Bank has actively engaged with the Ministry of Finance in perfecting the legal basis related to the securities market such as the Securities Law and the guiding documents of the Securities Law Fifth, improve the effectiveness and efficiency of the management work: The State Bank and the Ministry of Finance regularly exchange information, forecast the currency market, capital markets, and the management of the State Treasury's budget to strengthen coordination in the management of monetary policy and fiscal policy At the same time, regularly exchanging information, coordinating in closely monitoring market fluctuations (securities, currencies, foreign exchange ) to unify the direction and administration views, thereby improving the effectiveness and efficiency of management, creating trust for domestic and foreign investors, and maintaining market stability 3.3 GENERAL EVALUATION AND OBJECTIVES OF MONETARY AND FISCAL POLICY IN VIETNAM D URING COVID -19 PANDEMIC 3.3.1 Fiscal policy Policies to support businesses: It is necessary to review the policy of reducing corporate income tax because the majority (accounting for 98% of businesses) are struggling or at risk of bankruptcy because the cost burden that supports corporate income tax reduction is not suitable for them Only 2% of businesses that have not been affected 17 by COVID-19 benefit from this policy Reducing corporate income tax is an improper means of support, wasting resources while creating inequality in the business community and worsening the business environment The tax extension/reduction should only apply to value-added tax, the beneficiary will be more Public investment: Remains the main platform for economic growth in the near future While demand for spending from the business sector and people has fallen sharply, the State needs to act as the main target of spending Therefore, promoting public investment spending plays a very important role Social security policies: such as paying unemployment insurance, supporting people who have been temporarily suspended from work, subsidizing the poor, people who have lost their livelihoods, It needs to be a top priority in terms of resources and implementation quickly, especially if the epidemic re-outbreaks in the country Supportive policies need to cover vulnerable groups – low-level workers and informal sector workers as they make up a large, vulnerable, hardest-hit proportion, and the rapid rate of income declines if the economy falls into recession 3.3.2 Monetary Policy Monetary policy, specifically interest rate instruments at present will be less effective As long as the epidemic persists, some specific needs will disappear, according to which the businesses serving those needs will not return, even if the interest rate decreases will not create incentives for enterprises to borrow capital to invest in production and business In other words, for most businesses, the interest rate factor does not necessarily determine the behavior of investing or opening a business at the moment Therefore, credit support policies should focus on the group of businesses that are little or not affected, or have an effective direction of transformation At the same time, the institutional environment and industry policy need to be improved Fiscal policy is considered to be more effective during the Covid-19 period Assoc Prof Dr Vu Sy Cuong emphasized that: “In 2022, it is necessary to continue to implement the principle of fiscal policy administration which is proactive and flexible in short-term improvisation but adheres to the principles of budget balance and financial discipline in the long term” 18 The ultimate goal: "To focus on effective epidemic prevention and stability of production and business development" 19 CONCLUSION Monetary policy and fiscal policy have a binding relationship with each other To achieve the economic goals set by the state, these two policies need to be coordinated and complement each other appropriately Without the coordination between fiscal policy and monetary policy, the economy will face great challenges in balancing state budget revenue and expenditure monetary stability, it is difficult to achieve the goal of sustainable economic growth The current situation requires us to have a new perspective on monetary policy and also on fiscal policy Prioritizing macro stability is a must, but the balance between stability and development is more important Current market developments call for a new, more flexible, yet more efficient balancer system Faced with such difficulties, in these last months of 2021, the Ministry of Finance and the State Bank of Vietnam need to continue to coordinate closely to monitor the economy's developments in order to promptly respond to shocks and implement supportive solutions The economy will recover as soon as the domestic epidemic is under control In addition, in order to have policy space to realize dual goals, the fiscal policy needs to tighten fiscal discipline, mobilize non-state resources for epidemic prevention and social security At the same time, for monetary policy, it is necessary to monitor credit growth to ensure capital flows into production and business instead of speculative channels 20 REFERENCES https://www.investopedia.com/terms/m/monetarypolicy.asp https://topkinhdoanh.com/chinh-sach-tien-te-la-gi/ https://www.imf.org/external/np/leg/sem/2004/cdmfl/eng/hilber.pdf Interaction of Monetary and Fiscal Policies: Why Central Bankers Worry about Government Budgets by PAUL HILBERS National Assembly Newspaper: quochoi.vn Tạp chí ngân hàng: Phối hợp sách tài khóa sách tiền tệ kiểm sốt thị trường tài PGS.,TS Nguyễn Trọng Tài Thời báo tài Việt Nam: Chính sách tài khóa tiền tệ: Phối hợp chặt chẽ để thực mục tiêu kép Tác giả: Mai Lâm 21 ... is mainly about: ? ?Relationship between monetary policy and fiscal policy: From theories to reality in Vietnam? ?? We focus on studying the relationship of fiscal policy and monetary policy and analysing... 10 2. 3 THE IMPACT OF FISCAL POLICY ON MONETARY POLICY 12 2.4 THE IMPACT OF MONETARY POLICY ON FISCAL POLICY 14 III RELATIONSHIP BETWEEN MONETARY POLICY AND FISCAL POLICY IN VIETNAM. .. They include capital gains taxes, national insurance taxes, and other corporate taxes II RELATIONSHIP BETWEEN MONETARY POLICY AND FISCAL POLICY 2. 1 CO OR DINATION OF MONETARY POLICY AND FISCAL POLICY