ProblemStatement
Theworlde c o n o m ic crisis beginningi n 2008sofarhavenotseenstrongrecovery trendwhena d v e r s e s h o c k s occurinalmosta l l countriesandcontinents, whil etherisko f theEuropeand e b t c r i s i s stillimplicit t h r o u g h o u t 2 0 1 1 an d e x t e n d i n g u n t i l now.
InVietnam,animportantpointin2011isResolution1 1 / N Q - C P o f theGovernmentwitht h e a i m o f c u r b i n g i n f l a t i o n a n d m a c r o - e c o n o m i c s t a b i l i t y , a c c o r d i n g t o the tighteningm o n e t a r y a n d f i s c a l p oliciesa r e consideredc a r e f u l l y a n d c l o s e l y throughouttheyear;inwhichthe monetarypolicytoolshavespecialimportanceforthecharacteristicso f Vietnam'se c o n o m y i n influencingthe growthand
Macroeconomic stability is heavily influenced by monetary policy, which serves as the primary source of capital distribution through the banking system and credit institutions In the coming years, effective monetary policy will be essential for facilitating investment capital flows and shaping business strategies across various sectors It plays a pivotal role not only in supporting working capital for businesses but also in fostering an environment conducive to long-term development strategies through investment Furthermore, monetary policy is crucial for maintaining price stability, implementing foreign trade policies via exchange rate management, and ensuring liquidity in international payments Consequently, understanding monetary policy and its impact on macroeconomic stability is increasingly vital for Vietnamese authorities.
Furthermore,i t i s o f t e n s a i d t h a t t h e m o r e o p e n a n d d e v e l o p e d V i e t n a m is,t h e easiertheeconomytobeaffectedbyinternationalcircumstanceasVietnamwas not affectedb y t h e A s i a n c r i s i s i n 1 9 9 7 mucha s i t i s beingi n f l u e n c e d b y t h e g l o b a l financialc r i s i s f r o m 2 0 0 8 t o n o w B e i n g m o r e s e n s i t i v e t o g l o b a l e c o n o m y , i t i s morecrucialtobuildaneffectivemonetarypolicytoolssystemtoadjus ttheeconomy,especiallyduringtherecession.
Economictheoriesandempiricalstudiesshowsthatshocks inmonetarypolicycouldhavei n f l u e n c e inoutputandinflationt h r o u g h d i f f e r e n t c h a n n e l s ; h o w e v e r , t h e detailedi m p a c t o f t h o s e c h a n n e l s o n r e c e n t V i e t n a m e s e e c o n o m y h a s n o t beenstudiedq u a n t i t a t i v e l y s u c h asimpacto f monetaryp o l i c y o n inflatio no f theu r b a n area,therurala r e a andalloverofVietnami n s t e a d o f ininflationi n general Thiscreatesdifficultyfor policymakerstomanipulatethesuitablepoliciestoachievethemainobjectiveone a c h a rea.T h e r e f o r e , an empiricalstudyoft h e r e l a t i o n s h i p betweenm o n e t a r y p o l i c y c h a n n e l s an dthemacroeconomics v a r i a b l e s s u c h asrealoutputgrowthofVietnamandinflat ionoftheurbanarea,theruralareaandalloverofV i e t n a m witht h e l a t e s t u p d a t e d a t a f r o m 2 0 0 5 M 5 t o 2 0 1 2 M 6 ist i m e l y a n d necessary.
Significantofthestudy
Ther e l a t i o n s h i p b e t w e e n t h e m o n e t a r y policya n d t h e o u t c o m e o f t h e e c o n o m y suchasrealoutputgrowthandinflationraisesalotofconcernboththeor eticalan d empirical.However,there arestillmanycontroversialo p i n i o n s abou tthedirectionthatm a c r o e c o n o m i c s variablesa r e a f f e c t e d b y t h e m o n e t a r y p o l i c y f o r d i f f e r e n t countries.
Thusfar,therehavebeens o m e studiesaboutmonetarypolicyi n Vietnams u c h asastudybyHoang(2010)ontheeffectandtimetotakeplaceofachangeinmoneysu pplyonrealoutputandinflationthroughdifferentchannels.Hefoundconsisten tevidencethatmonetaryp o l i c y has significanteffectonrealoutput andpricele ve l, buta t l o w p e rc e n t a g e ; o r C a m e n ( 2 0 0 6 ) o n t h e b o t h e x t e r n a l f a c t o r s a n d p o l i c y factoronthefluctuationininflation.Therearealsosomeotherresearchesf o c u s e d particularlyo n c h a n g e s i n o u t p u t causedb y t h e e x c h a n g e rateratio Howeve r, a l l thosepapersdonotpointoutclearlyanddirectlythedirectioninwhichrealout put
Recent studies on the impact of monetary policy in Vietnam, such as those by Bui (2011) and Nguyen (2012), have examined the relationship between money growth, inflation, and credit mechanisms However, these studies overlook the effects of monetary policy on inflation in both urban and rural areas Additionally, most research relies on outdated data, as they were last updated by the end of 2010, failing to account for recent inflation trends and the ongoing global financial crisis, which have significantly altered the macroeconomic landscape.
Thisstudy,therefore,istimelyandrelevanttothecurrentcircumstanceofVietnamasit helpspolicymakerstomanipulatethemonetarypolicyinordertoachievethemaint argetinrealoutputgrowthandinflationcontrol.Itcanalsobeasuggestionforfurtherresearch eso n monetaryp o l i c y a s wella s otherpoliciesi n eachrurala r e a , urbana r e a a n d a l l o v e r o f Vie tn am, c o n t r i b u t i n g a moreu n d e r s t a n d i n g a b o u t t h e ev olutionoftheVietnammoneymarket.Furthermore,thisstudy,somehow,addstothewi deknowledgeofmonetarytransmissionmechanismoftheurbanarea,theruralareaandallovero fVietnamandindifferentcountriesinreality.
Researchobjectives 1.4 Researchquestions 1.5 ThesisStructure
• toclarify therelationship b e t w e e n m o n e t a r y p o l i c y a n d reale c o n o m y ( r e a l outputgrowthandinflation)ofVietnam.
• toclarifythedifference ofimpactofmonetarypolicyoninflationoftheurbanandtheruralareaofVietnamsepara tely. ằtoc l a r i f y t h e i m p a c t o f e a c h c h a n n e l i n t he t h r e e m a i n m o n e t a r y c h a n n e l s (interestratechannel,creditc h a n n e l ande x c h a n g e r a t e c h a n n e l ) o n r e a l economy(realoutputgrowthandinflation)ofVietnam.
• If yes,whatdirectiondoesrealoutputgrowthofVietnamandinflationrateoftheurban area,theruralareaandalloverofVietnamchangeswhentherearechangesinmo netarypolicyf r o m theStateB a n k ofVietnamandhowsignificantarethosech anges?
• Howlongdoesittakethechangesinthemonetarypolicytothe changesintherealoutputgrowtho f Vietnama n d inflationrateoftheurbana r ea, theruralareaandalloverofVietnam?
The thesis is structured into six chapters The first chapter outlines the problem statement, highlights the significance of the study, and presents the research objectives and questions The second chapter provides a summary of the related literature reviews In the third chapter, an overview of Vietnam's economic performance, financial system, and monetary policy tools is introduced Chapter four details the methodology employed in the regression model, presents the estimated results, and discusses their policy implications for Vietnam The final chapter summarizes the study, its policy implications, limitations, and suggests areas for further research.
Monetary policy is a crucial tool for government intervention in the economy, often referred to as the "visible hand." Its primary objectives include fostering economic growth, maintaining price stability, and reducing unemployment rates While some may view it as a mechanism for achieving quick and convenient results, it is, in fact, a highly efficient system with unique features Monetary policy plays a vital role in preventing economic disturbances caused by money and other factors, while also providing a stable economic environment According to Friedman (1968), key elements such as exchange rates, price levels, and the amount of aggregate money—including currency and adjusted demand deposits—are essential tools for policymakers.
Anexaminationoft h e theoreticalandt h e empiricalanalysisleadst o theconsiderati onofvariousp o t e n t i a l m o n e t a r y p o l i c y t o o l s t h a t i s necessary f o r thestudi esofthe effectsofmonetarypolicytotwomacroeconomicvariables:realoutputgrowthandinflation.
Therefore,thischapterisdividedintotwomainparts:Theoreticalliterature revie wandpreviousempiricalstudiesrelated.Thetheoreticalliteraturereviewpartreferstother e l a t e d t h e o r i e s o f m o n e t a r y p o l i c y s u c h a s K e y n e s i a n A S -
A D m o d e l o n t h e mechanismo f theimpactofaggregatedemandtooutputandpricel evel,thetraditionalKeynesianIS/LMmodel,theMundell-
Flemingmodel,Tobinq’stheory,monetarytransmissionmechanismandconceptualframew orkforthestudytoservethestudyofthethesis.Thepreviousempiricalstudiesrelatedpart reviewsthesimilarempiricals t u d i e s intheworlda n d Vietnamt o learnf or mys t u d y Detailso f eachpartareintroducedindetailinthefollowingitems:
Theoreticalliteraturer e v i e w 1.Mechanismoftheimpactofaggregatedemandtooutputandpricelevel 2 TraditionalKeynesianIS/LMmodel
Monetarytransmissionmechanism
The monetary transmission mechanism is defined as the process through which monetary policy affects output, employment, prices, and inflation (Samuelson and Nordhaus, 2010, p 211) In Vietnam, monetary policy influences the economy primarily through three channels: the interest rate channel, the credit channel, and the exchange rate channel Given that the Vietnamese stock market is still in its early stages of development, the VN INDEX is prone to speculation, and there is no available housing index in the economy Therefore, this thesis does not address the equity price channel or the real estate channel.
In his research on the monetary transmission mechanism, Taylor (1995) highlights the significance of short-term interest rates in influencing the economy He identifies a circular relationship between movements in real GDP, inflation, and short-term interest rates A change in short-term interest rates impacts both long-term interest rates and exchange rates, although other factors also play a role over time Due to economic rigidities, such as price stickiness, adjustments in nominal interest rates and exchange rates lead to shifts in real interest rates and real exchange rates These changes subsequently affect real investment, real consumption, and real net exports.
-9- constituentsofGDP,henceleadst o achangeinrealGDP.Inlongr u n , realvariablesr e t u r n t o t h e i r normalv a l u e whenw a g e s a n d g o o d s pricesa r e notrigid.Inturn,t hechangeinrealGDPandinflationwillalsohaveeffectontheshortrate.Inth e c a s e o f z e r o n o m i n a l i n t e r e s t r a t e , a d e c r e a s e i n r e a l i n t e r e s t r a t e s t i l l c a n stimulatet h e economybytheexpectedp r i c e levelandexpectedinflation.Anexpan sionint h e b r o a d moneym a k e s t h e e x p e c t e d p r i c e l e v e l a n d t h e r e b y t h e expectedinflationgoesup. Astheresult,thereali n t e r e s t rated e c r e a s e andinvestment, netexportandhenceoutputallincrease.Itisdescribedasthefollowing notation:MS
MSca u se s thereali n t e r e s t rate ( i , ) tof a l l , whichm e a n s t h a t theco s t ofcapita lisl o w e r e d Thefalli n r e a l interestrate inducesbusinessestoincreasespendingo n i n v e s t m e n t s s p e n d i n g a n d c o n s u m e r s t o i n c r e a s e t h e i r h o u s i n g a n d durableexpenditures,wh ich a r e alsoconsideredi n v e s t m e n t T h i s increasei n investmentspending(I)leadsinturntoanincreaseinaggregatedemandandariseinoutput(Y). Thisprocessisillustratedinthefollowingschematic:
Mishkin( 1 9 9 6 ) demonstratedi n hispaperthreereasonsexplaining theimport ance ofcreditchannelstotheeconomy.Firstly,theeffectofcreditmarketi m p e r f e c t i o n tot h e f i r m s ’ d e c i s i o n o n i n p u t a n d o u t p u t s u c h a s t h e n u m b e r ofw o r k e r s andmachinesiswidelyaccepted.Secondly, thereisempiricalevidencet h a t smallcompanieswhofac e creditconstrained a r e morea f f e c t e d bymonetary policyt h a nlargefirms.Finally,hepointedoutthatas ymmetricinformationintheimperfectcreditmarketalsohelpstoclarifysomeeconomi cphenomena.
' Notationares a m e a s p r e v i o u s o n e , P ' , i i aree x p e c t a t i o n o f p r i c e levela n d expectationo f i n f l a t i o n , respectively.
Research by Bernanke and Gertler (1995) likens monetary policy transmission to a "black box," highlighting the need for empirical evidence regarding interest rate channel effects They propose that the credit channel plays a crucial role in elucidating how monetary policy impacts the economy, suggesting that analyzing the interplay between external finance premiums and interest rates can enhance understanding This credit channel addresses agency problems stemming from asymmetric information and costly contract enforcement in financial markets, which can be divided into two specific channels: the bank lending channel and the balance sheet channel The bank lending channel specifically explains the effects of monetary policy through changes in the supply of bank loans, underscoring the vital role banks play in mitigating asymmetric information issues, as bank loans are not perfectly substitutable with other funding sources.
Hence,d e s p i t e t h e f a c t t h a t l a r g e f i r m s m a y d i r e c t l y a c c e s s t h e s t o c k a n d b o n d marketst o g e t t h e c r e d i t w i t h o u t g o i n g t h r o u g h b a n k s , s m a l l a n d m e d i u m - s i z e d firmswillstilldependmostlyonborrowingfrom banksfort h e i r investment.Consequently,adecreaseinbankreservesandbankde positduetoacontractionofmonetarypolicywillreducethev o l u m e ofb a n k loansa ndint u r n w i l l causeinvestmenttodecline.T h i s i s r e s u l t f r o m t h e f a c t t h a t t h a t w h e n t h e b a n k l o a n s decrease,f i r m s n e e d t o f i n d n e w l e n d e r s a n d e s t a b l i s h a newc r e d i t r e l a t i o n s h i p whicha r e c o s t l y t o f i r m s a n d a r e l i k e l y t o r e d u c e f i r m s ’ performance i n r e a l i t y , whic hm e a n s t h a t i n v e s t m e n t d e c l i n e s O u t p u t w i l l t h e n g o downa s aresult.T h e effecti s d e s c r i b e d i n t h e s c h e m a t i c s u m m a r y b y ( M i s h k i n , 1995)“MS- -
However,t h e e x i s t e n c e o f t h e b a n k l e n d i n g c h a n n e l i s s t i l l c o n t r o v e r s i a l S o m e researchers,s u c h as RomerandRomer(1989)are suspiciousoftheabilitythatbankloansca n be a f f e c t e d s i g n i f i c a n t l y b yt he m o n e t a r y p o l i c y d u e t o f i n a n c i a l
-11- easierforthebankstodealwiththedepositsreductiondifficultyduringamonetaryco ntraction.T h i s f a c t a l o n g withthed ro p ofthetraditionalb a n k l e n d i n g busine ssallo v e r t h e w o r l d m a k e t h e r o l e o f t h e b a n k s a s w e l l a s thea v a i l a b i l i t y o f banklendingchannellessimportant(EdwardsandMishkin(1995).
T'heb a l a n c e - s h e e t channel(orthenetworthchannel)explainstheeffectsofmonetarypolicyt otheeconomyb a s e o n t h e c h a n g e i n b o r r o w e r s ’ b a l a n c e s h e e t s andincom estatements Theformeroneisaffectedindifferentways.
Ad e c l i n e i n moneys u p p l y i n d u c e d b y a monetaryc o n t r a c t i o n ma ya c c o u n t f o r alowerequityprices(*'ml.Thisl o w e r n e t w o r t h r a i s e s t h e p r o b l e m s o f a d v e r s e selectiona n d m o r a l h a z a r d T h e f o r m e r h a p p e n s becausea dro pinnetworthwilllowervalueofcollateralfor lenders’loansandtheysufferfromhigherlooses.Moralhazardproblemhappensduetothe factthatwhentheequityvalueoffirmsreduces,theym a y h a v e m o r e i n c e n t i v e t o i n v e s t i n r i s k i e r p o r t f o l i o s a n d l o a n s a r e m o r e likelytobedefaulted.Soth at,afallinafirm’snetw o r t h m i g h t result i n adecline inl e n d i n g a n d t h e r e b y , i n i n v e s t m e n t T h u s , t h e outputoraggregatedem andwilldecreaseaswell.Thisprocesscanbedescribedasfollows:“MS
Ia d v e rs e selection, moral hazard- - › lendingJ •I- - › Y” (Mishkin,1995).
Furthermore,a tighteningo f monetarypolicymayalsopushupinterestratewhichl eadst o a d e t e r i o r a t i o n o f f i r m ’ s b a l a n c e s h e e t s b e c a u s e o f a l o w e r c a s h f l o w , a higheri n t e r e s t r a t e an d hence a risei n thec h a n c e o f a d v e r s e s e l e c t i o n a n d m o r a l hazardproblem.StiglitzandWeiss
(1981)calledthisphenomenon“creditrationing”wherefirmswhoarewillingtopaythehi ghesti nt er est ratearethosewhohavetheriskiestinvestment T h i s c h a n g e b u i l d s u p a “ f i n a n c i a l p r e s s u r e ” t h a t a c c o u n t f o r thedropin investmenta n d h encethefallinoutput.
“M'J——›iJ •cashflowJ-—›adverseselection,moralhazardJ -›lending
Athirdw a y thatt o describe thel i n k be tw een o u t p u t a n d c h a n g e i n them o n e t a r y policyi s t h r o u g h t h e pricel e v e l Am o n e y s u p p l y reductionm a y c a u s e anunanticipatedfallinthepricelevelbecauseofnominalpricerigidityincontracts.Aresu ltofthisisadeclineintherealnetworthwhichthenincreasestheproblemo f adverseselectiona n d moralh a z a r d T h e continuede f f e c ts areaspreviousc a s e an canb e s u m m a r i z e d a s “MS • u n a n t i c i p a t e d P ——
Thet h e o r y o f c r e d i t c h a n n e l o n b u s i n e s s a s s e t i s s i m i l a r l y a p p l i e d t o c o n s u m e r spendingbyBemankeandGertler(1995).Atighteningmonetary policymayleadstoa l o w e r e q u i t y p r i c e s ase x p l a n a t i o n above,h e n c e , consumersm i g h t meet ahigherpossibilityoffinancialdistress(i.e.theirfinancialassetssuchasstockandbon dpriceislower)anditislikelythattheymaypreferthemoreliquidassetratherthanthe ill iquidone.Thisresultsinadeclineintheconsumptionofdurablegoodsandhousin gandinturnafallinoutput.Mishkin(1995)summariesthisprocessas follows:
In an open economy, net exports are significantly influenced by exchange rates, which serve as a vital channel for monetary policy to affect the economy Taylor (1995) highlighted the importance of this channel in the monetary transmission mechanism When authorities implement a contractionary monetary policy, interest rates rise, leading to an appreciation of the domestic currency as deposits in the domestic currency become more attractive than those in foreign currencies This appreciation results in domestic goods becoming relatively more expensive compared to foreign goods, stimulating imports while reducing exports Consequently, net exports decline, which can lead to a decrease in overall output This relationship is further supported by Mishkin (1996), who summarizes it as follows: “MS —› it —• E$ —-—› NX ———› Y.”
A study by the IMF (1996) analyzing 145 countries over 30 years reveals that fixed exchange rate regimes can lead to lower inflation rates by enhancing currency confidence and enforcing stricter policy discipline Consequently, pegged exchange rates are viewed as effective anti-inflationary tools; however, they may pose risks to output growth and employment due to increased volatility Radzyner and Riesinger (1997) argue that pegged or narrowly fluctuating exchange rates limit the use of exchange rates as a monetary policy tool They also advocate for central banks to maintain autonomous monetary policy, independent of government influence.
When analyzing macroeconomic perspectives, there appears to be a trade-off between low inflation rates and high output growth Evidence suggests that countries with fixed exchange rates tend to experience lower economic growth compared to those with fluctuating exchange rates This difference is largely attributed to the impact of exchange rates on investment and productivity Fixed exchange rate regimes can lead to higher investment by reducing uncertainties in the policymaking process and lowering interest rates However, they may also result in lower productivity growth due to potential misallocation of resources if the fixed exchange rate is misaligned Conversely, countries that allow their exchange rates to fluctuate are better positioned to align with true market prices, thereby minimizing price distortions and fostering economic growth.
4ThenotationM',i,E,NX,YstandsforMoneysupply,interestrate,Exchangerate(domesticcurrencyto , foreigncurrency),NetexportandOutput,respectively.
EXCHANGE RATE CREDIT INTEREST RATE
OUTPUT, INFLATION makeabetterresourcesallocation.Inbrief,consideringbotheffects,aconclusionisdra wnt h a t g r o w i n g p a c e iso f t e n h i g h e r i n c o u n t r y w i t h f l o a t i n g e x c h a n g e r a t e regimeIMF(1996).
Conceptualframeworkforthestudy
Alongw i t h a w i d e v a r i e t y s u p p o r t i n g t h e o r i e s , t h e r e a r e m a n y r e s e a r c h e s o n t h e relationshipb e t w e e n monetary policytoolsandmacroeconomicsi n d i c a t o r s Manystudiesfocusonthemonetary transmission m e c h a n i s m i n differentperiods u c h asthes t u d i e s o f B e r n a n ke a n d B l i n d e r ( 1 9 9 2 ) a n d Ber nankea n d G e r t l e r ( 1 9 9 5 ) f o r theUnitedState.T h e studyalsoappliedforman ydifferentcountriess u c h asDisyatatandV o n g s i n s i r i k u l (2003)b u i l d aV
A R modelforThailand;M o r s i n k andBayoumi(1999)examinesthecaseofJapan andHsing(2004)worksthroughthedataofVenezuela.
InmanyVAR-basedresearches,short-terminterestrateshave beenusedasapreferredi n d i c a t o r ofmonetarypolicyst a n ce Anexampleofthisisth econclusionofBernankeand B l i n d e r ( 1 9 9 2 ) abouttheparticularroleofFedera lFundsRateasthem a i n m o n e t a r y p o l i c y t o o l i m p l e m e n t e d b y F e d o v e r 3
The theory of interest rate transmission mechanisms remains controversial due to limited evidence of its quantitative effects on capital variables Research by Dimitri et al (2009) in Romania revealed significant responses of inflation to interest rate shocks, with industrial production reacting notably to interest rate variations In contrast, studies by Boivin and Giannoni (2002) indicate a declining response of real output to interest rate channels since the 1980s in the U.S Additionally, empirical research on Tobin's q has shown limited success, prompting researchers like Bemanke and Gentler (1995) to propose that mechanisms other than interest rates, such as the credit channel, may play a crucial role in the transmission of monetary policy.
Theresearchonresponseofoutputtoexchangeratealsoreceivesdifferent result s.Edwards( 1 9 8 6 ) ex a m i n e d t h e g r o u p o f t w e l v e d e v e l o p i n g c o u n t r i e s f o r 1 6 years
Previousempiricalstudiesrelated 2.3.Chapterremarks CHAPTERIII:ECONOMYPERFORMANCE,FINANCIALSYSTEM
Alongw i t h a w i d e v a r i e t y s u p p o r t i n g t h e o r i e s , t h e r e a r e m a n y r e s e a r c h e s o n t h e relationshipb e t w e e n monetary policytoolsandmacroeconomicsi n d i c a t o r s Manystudiesfocusonthemonetary transmission m e c h a n i s m i n differentperiods u c h asthes t u d i e s o f B e r n a n ke a n d B l i n d e r ( 1 9 9 2 ) a n d Ber nankea n d G e r t l e r ( 1 9 9 5 ) f o r theUnitedState.T h e studyalsoappliedforman ydifferentcountriess u c h asDisyatatandV o n g s i n s i r i k u l (2003)b u i l d aV
A R modelforThailand;M o r s i n k andBayoumi(1999)examinesthecaseofJapan andHsing(2004)worksthroughthedataofVenezuela.
InmanyVAR-basedresearches,short-terminterestrateshave beenusedasapreferredi n d i c a t o r ofmonetarypolicyst a n ce Anexampleofthisisth econclusionofBernankeand B l i n d e r ( 1 9 9 2 ) abouttheparticularroleofFedera lFundsRateasthem a i n m o n e t a r y p o l i c y t o o l i m p l e m e n t e d b y F e d o v e r 3
The theory of interest rate transmission mechanisms remains highly controversial due to limited evidence of its quantitative effects on capital variables Research by Dimitriou et al (2009) in Romania demonstrated that inflation significantly responds to shocks from interest rates, while industrial production also reacts notably to these rate variations In contrast, studies by Boivin and Giannoni (2002) indicate a declining response of real output to interest rate channels since the 1980s in the U.S Additionally, empirical research on Tobin’s q formulation has seen diminishing success As a result, many researchers, including Bemanke and Gertler (1995), propose that alternative mechanisms, such as the credit channel, may play a crucial role in the transmission of monetary policy.
Theresearchonresponseofoutputtoexchangeratealsoreceivesdifferent result s.Edwards( 1 9 8 6 ) ex a m i n e d t h e g r o u p o f t w e l v e d e v e l o p i n g c o u n t r i e s f o r 1 6 years
, f i s c a l deficit,relativepriceofexportstoimportsandreale x c h a n g e rate.Hethenca meto
-16- theconclusionthatdevaluationshavenegativeimpactonoutputfortheshortperiodofo n e y e a r a n d a f t e r t h a t , w i t h o t h e r v a r i a b l e s k e p t c o n s t a n t , r e a l d e v a l u a t i o n s affectsoutputinapositivewayandinlongrun,theeffectisneutral.Li kewise,theresultsfromt h e studyb y D u m i t r i u eta 1 ( 2 0 0 9 ) i n R o m a n i a alsos h o w e d t h a t inflationa n d industrialproductionh a v e sig nificant responsest oshocksfromexchangerate.AnotherresearchbyAl-
Mashata n d Billmeier(2007)in Egyptthroughevaluatedthemonetarychannelsin aVARmodelshowedthattheexchangeratec h a n n e l p l a y a n i m p o r t a n t r o l e i n t h e t r a n s m i s s i o n oft h e m o n e t a r y stance.Mostotherchannelsarequiteweak.
Thereareseveralresearcheson responseofoutputgrowthandinflationtomonetarypolicytoolsinVietnam.Thestudyby Vo,e t at.
Research conducted in 2001 highlights the significant impact of changes in exchange rates (ERs) on the Granger-causality relationship among output growth, inflation, and money growth Although nominal ERs served as an inconsistent leading indicator for output growth, this causality was not stable Current inflation and real industrial output growth have primarily been influenced by their historical movements Additionally, real depreciation rates have positively affected output growth, albeit with considerable variability In a 2008 study, Leand and Wade developed a VAR model to explore the relationships among money, real output, price levels, real interest rates, real exchange rates, and credit Their findings indicate that monetary policy significantly influences real output and price levels, with the effects on output being most pronounced after four quarters, while the impact on price levels manifested more gradually, specifically from the third to the ninth quarter.
H o w e v e r , t h e si g n i f i c a n c e o f eachchannelw a s w e a k , a n d t h e c r e d i t a n d e x c h a n g e r a t e c h a n n e l s a p p e a r e d t o b e t h e mostsignificantchannelsort h e t h e s i s ofHoang(2010)isalsoanalyzingthemonetary transmissionmechanisminV i e t n a m b y u s i n g t h e V A R a p p r o a c h a n d focusi ngo n ther e d u c e d - f o r m r e l a t i o n s h i p s b e t w e e n m o n e y , o u t p u t , o u t p u t ’ scomponents,p r i c e l e v e l , i n t e r e s t r a t e , r e a l e x c h a n g e r a t e a n d c r e d i t H e f o u n d
Recent studies indicate that monetary policy significantly influences real output and price levels in Vietnam, albeit at a low percentage While credit has a notable impact on output, interest rates and exchange rates do not significantly affect price levels Research by Bui (2011) highlights a positive correlation between money growth and inflation in both the short and long run, emphasizing the critical role of the credit channel in monetary transmission Nguyen's (2012) findings reveal that independent variables lack Granger causality with money supply in classical markets, although money supply can predict most dependent variables without credit, except for lending rates In an augmented market, domestic credit is crucial for forecasting money supply, while price levels and lending rates also contribute but are ineffective in classical markets Additionally, in response to tightening monetary policy, output and refinancing rates show sensitivity to money shocks, whereas lending channel responses are often short-lived or abnormal Overall, the credit channel remains vital in the monetary policy framework in Vietnam.
Nominal money, Fiscal deficit,Termsof trade,Realexchanger ate,Governmentexpe
Theshort-runadevaluation willgenerat ea declineinag gregateo u t p u t After o n e y earadevaluationwillhaveane xpansionary e f f e c t onout put.I n t h e long- rundevaluationsw i l l haven oeffectonoutput.
M1,M2, FederalFu ndsrate,three- monthTreasurybillr ate,ten-year
Treasurybond rate, Industrialproductio n,Capacityutilizatio n,Employment, Unemployment rate,
Housingstarts,R e t a i l s a l e s , Consump tion,Durable- goodsorders
UseS t r u c t u r a l VARmodeltoan alyze theGranger causality tests,variancedeco mpositions,and impulseresponsef unctions
Thefunds rate i s agood indicator of monetarypolicy.
Nominal interest rates serve as effective indicators of real economic variables, with the Federal funds rate being particularly informative Monetary policy influences the composition of bank assets, where tighter monetary policy leads to a short-run sell-off of banks' security holdings, having minimal impact on loans Additionally, the timing of the responses of loans and unemployment to monetary policy changes is noteworthy.
347 RealGDP,GDP deflator,i n d e x o f commodityprices,F ederalf u n d s r a t e , Final demand,Inventoryin vestment
UseVARmodel Monetarypolicyhasa strongi m p a c t o n d u r a b l e goodsspending.Thelargea ndr a p i d r e s p o n s e o f hou singinvestmenttochangei n m o n e t a r y p o l i c y Botht h e b a l a n c e s h e e t a n d bankl e n d i n g channelshaveplay edimportantrolesinthehousin gm a r k e t Morsink andBayou mi(1999) l980Ql- l998Q3 75 Real Private
Demandandits4 co mponents,Consumer PriceIndex,
UseV A R m o d e l inr e d u c e d for mto analyzeimpulsere sponsefunctions
Monetarypolicyandbanks’ balancesheetsareimportantso urcesofshock,banksplayacruci alroleintransmittingmonetary shockstoeconomicactivity, businessinvestmenti s espec iallysensitiveto m o n e t a r y shocks
Monetaryaggregate s(currency in circulationC U , MI, andM2),Real ind us t ri al o u t p u t , ConsumerPriceI ndex
Official exchangerat e (OER),Selli nginterbank exchange rat e( S E R ) , p arallelsellin gexchange ra tei n H o Chi
Minh City (S SER), parallel selli ng exchange r ate in
UseVARmodels, Co- integrationtechni ques,ErrorCorrecti on
Therat eo f changesi n ER s hasaltered s i g n i f i c a n t l y t h eGranger- causalitybetween outputgro wth,inflation,andmoneygrowt h.
ThechangesinnominalERs(int h e c a s e s o f O E R s a n d S ERs)served,albeitinconsi stently,asaleadingindicatorf o r outputgrowth,butthisca usalitywasnotstable.Curre ntinflationand(reali n d u s t r i a l ) o u t p u t growthh a v e b e e n m o s t l y explainedb yt h e i r pastmovements.
Realdepreciationrateshavehad apositivea n d r a t h e r signifi cantim pact onoutputgrowth ,t ho ug h t h e magnitudew a s v e r y unstable.
Boivin 1960 - 42 Output, inflation, Timeseri es data The change in the and 2001 andinterestr a t e s UseVARm o d e l propagationmechanismh a s
VARs al a r g e e x t e n t T h i s c h a n g e hasb e e n a s s o c i a t e d f u r t h e r witha d i m i ni s he d e f f e c t o fmonetaryp o l i c y s h o c k s o n outputandinflation.
Disyatat 1993Q1- 36 Real GDP, Baht/US Timeseries data Thes t y l i z e d factsabout and 2001Q4 Consumer Price exchange UseVARm o d e l the response of the
Vongsinsi Index (PRICE), rate to analyze economytoatighteningof rikul and 14-day variance monetarypolicy:
(2003) repurchase rate decompositions, + The aggregate price
Initially, private and impulse-level consumption shows a minimal response, but investment begins to increase After about a year, export functions decline persistently, while imports and bank output follow a U-shaped response Effective exchange rates and asset prices start to bottom out after approximately 4 to 5 quarters, with interest rates dissipating after around 11 quarters.
+I n v e s t m e n t a p p e a r s to b e the most sensitive component of GDP to monetarypolicyshocks.
Hsing 1961 - 40 RealGDP,realM2, World Timeseries data Real GDP responds
In 2004, a VAR model was employed to analyze the impact of real government output and its relationship with various economic factors, including the real deficit, M2 money supply, and exchange rates The study found that shocks to the real deficit and crude oil spending significantly influenced the real exchange rate and inflation rate Additionally, the analysis revealed that real output negatively responded to inflation rate shocks, indicating a complex interplay between these economic variables.
-20- durings o m e o f t h e t i m e periods.Exceptfort h e lagge doutput,governmentdeficit spendi ng andt h einflation r a t e a r e t h e m o s t influenti alv a r i a b l e i n t h e firsty e a r , a n d r e a l M 2 a n d thereal exchangeratearemoreinflu entiala n d h a v e longer- termi m p a c t s afterthefirstye ar.
MonetaryPolicySt anceI n d e x a n d N ominalE f f e c t i v e ExchangeRate,Inter estrate(three- monthdeposit rate),Domesticcre dit,AssetP r i c e , R eserveM oney.
UseV A R m o d e l inr e d u c e d for mtoa n a l y z e t h e Granger causality tests,variancedec ompositions,and impulseresponsef unctions
Theexchangeratechannel playsa n i m po r t an t r o l e i n thetransmissiono f them onetarystance.Mostothercha nnelsarequiteweak.
Le and 1996Q2- 39 Real Industrial World Oil Timeseriesdata Monetarypolicycana f f e c t Wade 2005Q4 Output,Consumer Price, UseV A R m o d e l realoutput;the c o n n e c t i o
(2008) PriceIndex, Broad WorldRice inr e d u c e d for n m between money and
Money, Real Price and to analyze the inflationi s lessclear i n the Lending Rate, Federal Granger Vietnam case;thecreditand Indexoft h e Real FundsR a t e causality tests, exchanger a t e channels a r e
Credit and impulse response functions
2 ) , Non- Government Credit, Three month offered interestr a t e f r o m Romanian
UseVARm o d e l to analyze thevariancedecom positions
Inflationandindustrial productionh a v e s i g n i f i c a n t responsest o s h o c k s f r o m exchangerate,interestratesa ndmoneysupply.
LendingR at e, Inde xo f theR e a l Effec tiveExchangeRatean dDomesticCredit
OilPrice, World RicePrice andFederalF undsRate
UseV AR m o d e l i nr e d u c e d for mtoanalyzethe Granger causality tests,variancedeco mpositions,and impulseresponse f unctions compone nts,andinflation
C r e d i t affectso u t p u t a t a significantl e v e l w h i l e int erestr a t e a n d e x c h a n g e rated o not I n t e r e s t r a t e , exchangerat eandcr edi t do notaffect pricel e v e l atany significantl e v e l w h i l e m onetarypolicydoaffect.
79 ConsumerPrice Index,BroadMone y,RealIndustrialO u t p u t , DomesticC r e d i t , NominalEx change RateV N D /
The article explores the long-run relationship between money growth and inflation using the Engle-Granger Cointegration Test, Error Correction Mechanism (ECM), and Johansen Cointegration Test Additionally, it employs the Vector Error Correction Model (VECM), Granger causality tests, variance decompositions, and impulse response functions to analyze the short-run effects of money on inflation.
A significantly positive impactofmoneygrowthoni nflationinl o n g - r u n a n d short-run.
Creditchannelplaysanimport antroleinmonetarytransmissio ninVietnamcaseandinterestrat ehavebi- directionalcausalityto inflationandmoneysupply,butt hecorrelationbetweenlendingcha nnelandmonetarypolicyisquitew eak.
UseV A R m o d e l inr e d u c e d for mtoanalyzethe G ranger causality tests,variance deco mpositions, and impulse responsef unctions
Inclassicalmarket(incase oftighteningm o n e t a r y poli cy),theoutputresponsestomone ypolicyshockafteronel a g T h e o u t p u t responsesq u i t e s e n s i t i v e t o moneys h o c k Form a r k e t withc r e d i t , c r e d i t c h a n n e l playeda simportantchannelinm o n e t a r y policy mechanisminV ietnamcase,outputstrongresp onsestocreditshockafteronelag.
Thisthesisfocusesontheimpactsofmonetarypolicyo n macroeconomicvariables inwhichtwovariablesoutputandinflationareconcentratedandclarifiedindetails.Toc larifythisrelationship,theKeynesianAD-ASmodelisused.UnderKeynesianAS- ADm o d e l , a n i n c r e a s e i n m o n e y s u p p l y w i l l s h i f t a g g r e g a t e d e m a n d c u r v e rightwardi n thesho rt term.Asaresult,theeconomym ov ed toanewe q u i l i b r i u m withh i g h e r o u t p u t a n d p r i c e l e v e l T o s t u d y A g g r e g a t e D e m a n d , t h e t h e o r i e s o f TraditionalK e y n e s i a n I S /
F l e m i n g M o d e l a n d T o b i n q ' s theoryares t u d i e d a n d u s e d int h e t h e s i s E x p e r i m e n t a l l y , throught h e r e s e a r c h studies intheworldandVietnam,thetopicoftheimpactofmonetarypolicyontheeconomym a i n l y u s e d t h e V A R m o d e l , f o c u s i n g o n t h r ee m a i n c h a n n e l s s u c h a s inte restratechannel,creditchannelandexchangeratechannel.Therefore,thethesiswilla l s o u s e t h e V A R m o d e l w i t h t h r e e m e n t i o n e d a b o v e c h a n n e l s t o s t u d y t h e
Economic Growth (Real GDP growth)
Fora n o v e r v i e w oft h e economy,financialsystem asw e l l asm o n e t a r y policyimplementationinVietnam,asabasisforpolicyimplicatio nsandsolutionsfromtheempiricalresults,thischapterbrieflyintroduce abouttheec onomicgrowthofVietnaminr e c e n t y e a r s ; t h e n i n t r o d u c e V i e t n a m ' s fi nancialsystem,t h e r o l e o f CentralB a n k inV i e t n a m anditsd i f f e r e n c e s wit hdevelopedcountries;finally,introduceaboutmonetarypolicy frameworkandmonetarytoolsinVietnam.
Economyperformance
Inflationandoutputgrowth
Vietnamexperiencedhyperinflationinthesecondhalfofthe1980sandearly1990s. Int h e y e a r s 1987to1 9 9 1 , thea n n u a l i n f l a t i o n r a t e w a s a b o v e 4 0 % I t w a s t h e n followedbyareductionoftheinflationrateto32%i n 1 9 9 2 a n d c l o s e d t o 100oi n 1996.D u r i n g t h i s p e r i o d ,
Real GDP growth rate Inflation
Thesepoliciesweresuccessfultokeepinflationrateunder1 0 % since1996 Iteven wentf a r a b o v e e x p ec t a t i o n a s therewas a s l i g h t l y d e f l a t i o n i n the y e a r 1 9 9
9 and2002.S i n c e then,a f t e r a longperiodk e e p i n g thei n f l a t i o n r a t e bel ow g r o w t h r a t e (oneofthemainannualmacroeconomictargetintheSocio-
EconomicDevelopmentplan),i n f l a t i o n h a s p ic ked u p a g a i n i n 2 0 0 8 d u e tot h e e f f e c t o f therecent w o r l d financialc r i s i s
FinacialsystemandtheroleofCentralBankinVietnam ³ ×'³'²'°wi""'•i'
Since1 9 8 8 , a f t e r a c o m p r e h e n s i v e f i n a n c i a l s e c t o r r e f o r m , V i e t n a m s a w a dramaticallyt r a n s i t i o n f r o m themono-banksystemtoat w o - t i e r banksystemcontaining2parts:ThefirstoneistheState
BankofVietnam(SBV)whichbelongstotheGovernment.ItisgovernedbytheLawo ntheStateBankofVietnamandits
• governori s a m e m b e r o f t he G o v e r n m e n t T h e S t a t e B a n k o f V i e t n a m t a k e s t h e highest responsibility inc o n t r o l l i n g thef i n a n c i a l m a r k e t andsupervisingthe
-26- activitiesofcommercialbanksusingmonetarytools.Ithasamonopolyon printingcurrency,whichisloanedtotheGovernmentasalegaltender.Andthes e c o n d par t isa s y s t e m o f S p e c i a l i z e d C o m m e r c i a l B a n k s a n d o t h e r f i n a n c i a l organizationswhichd o themainb a n k i n g f u n c t i o n s suchasborrowinga n d l e n d i n g money f r o m peopleandcompanies.
Since then, the banking sector, particularly the State Bank of Vietnam, has made significant strides in development However, in the context of an unpredictable global economy, the banking sector faces unavoidable challenges The Vietnam Communist Party and Government have recognized the necessity of reforming the central bank, emphasizing the need for the State Bank of Vietnam to operate as a modern central bank within a socialist-oriented market mechanism, aligned with international practices This transformation aims to contribute to macroeconomic stability, control inflation, enhance the purchasing power of the Vietnamese currency, and support the country’s economic development A critical question arises: What defines a modern central bank?
Europe,Switzerland,N e w Zealand,andJapan organizationalmodelisindependen tfromthegovernment.InVietnam,themodelisdirectlyunderthegovernment.
According toa s t u d y b y t h e I n t e r n a t i o n a l MonetaryF u n d (IMF)a n n o u n c e d onDe cember2004,basically,thecentralbanksontheworldaredividedinto4levels ofindependenceinclude:Independenceinsettingoperationalobjectives;independencein s e t t i n g p e r f o r m a n c e targets;independenceint h e selectionofo p e r a t i n g i nstruments;andlimitedindependence,asfollows:
• thec e n t r a l b a n k isr e s p o n s i b l e ford e c i s i o n s o n m o n e t a r y p o l i c y , e x c h a n g e r a t e regime( i f notu n d e r t h e f l o a t i n g e x c h a n g e r a t e r e g i m e ) a n d m a y d e c i d e tom a j o r
-27- operationalo b j e c t i v e s a m o n g theobjectivesp r e s c r i b e d b y l a w Thisisthehi ghestlevelofindependencethatacentralbankcanachieve;atypicalexampleistheU. S.FederalReserveSystem(FED).
+Thesecondlevelisindependenceinsettingperformancetargets:Atthislevel,thecentra l bankisa l s o g i v e n t h e r e s p o n s i b i l i t y tod e c i d e o n m o n e t a r y policya ndexchangerateregime,b u t d i f f e r e n t f r o m thef i r s t levelis thata majoro p e r a t i o n a l objectiveo f t h e c e n t r a l b a n k iss p e c i f i e d i n t h e L a w , f o r e x a m p l e a s a l e a d i n g operationalobjectiveoftheEuropeanC e n t r a l Bank(ECB)isto" maintainingpricestability".
+Thethirdlevelisindependenceinthe selectionofoperatinginstruments:Withthismodel,theGovernmento r theNationalA s s e m b l y d e c i d e d thetargetsofmonetarypolicyafterdiscussiona n d agreement withtheCentralBank.Whenthedecisionisapproved,thecentralbankis responsiblefor the completionof theapprovedtargetsont h e basisof givenfulln e c e s s a r y authority tochoosethemostappropriatemonetaryt o o l T ypicalf o r thisl e v e l i s theReserveB a n k o f NewZ e a l a n d a n d theBankofCanada.
+Thef o u r t h l e v e l i s l i m i t e d i n d e p e n d e n c e : A s the l o w e s t l e v e l o f i n d e p e n d e n c e , accordingt o w h i c h G o v e r n m e n t isa d e c i s i o n - m a k i n g bodyoft h e p o l i c y (bothoperational objectivesandperformancetargets)aswellasinterventionintheprocessofimplementing m o n e t a r y p o l i c y T h i s i s oneof ther ea s o n s t h a t l i m i t the performanceo f thecen tralbank,e s p e c i a l l y i n theimplementationo f thetargeton maintainingthestab ilityofthevalueof money.ThisisthecaseoftheStateBankofVietnamatpresentandinfact,thislevelofindepen dencebegantoreveallimitationsands h o r t c o m i n g s
Inthelasttime,whendiscussingtheissueofthecentralbankreform,therearesomesuggesti onsthatVietnamshouldchoosethemodelofindependentcentralbankwiththeb a s i c re asongivenist h a t themoreindependentofcentralbankfromthegovernment,t h e mor e e a s i e r inimplementt h e targeto f maintenancel o w i n f l a t i o n rate,andthisisalsoc ompletelytrueintheory.
Moreover,somedifferent researcheshavealsocometotheconclusionthat countrieswhosecentralbankshaveahighlevelofindependenceoftenhavelow inflationrate(EijffingerandDeHaan,1996).
Ingeneral,studies oncentralbanksusuallyi n favoroftheideathatshouldentru stthef o r m u l a t i o n , makingdecisionsandi m p l e m e n t a t i o n ofm o n e t a r y p o l i c y toa centralbankthatisprofessional,i n d e p e n d e n t a n d steadfastintheprimar ygoalistomaintainthe stabilityofprices.Thatwillcontributetoimprovingtheeffectivenessofthepolicyimplications aswellasthecredibility ofpolicymakers.
State BankofVietnamsh o u l d begivenmoreautonomyinmakingpolicydecisionswithout i n t e r f e r e n c e f r o m stateagenciesor politicalp r e s s u r e ; s i m u l t a n e o u s l y h a v e therighttocontrolalltoolsthataffecttheobjectivesofmonetarypolicy,especially
TheG o v e r n m e n t h a s a f u n c t i o n t o p r e p a r e a n a n n u a l p l a n f o r m o n e t a r y p o l i c y , includingt h e p r o j e c t i o n fori n f l a t i o n a n d g r o w t h w h i c h i s t h e n s u b m i t t e d t o t h e NationalAssembly PartoftheroleoftheNationalA s s e m b l y i s t o s e t t h e a n n u a l inflationandgrowthtargetinlinew i t h t h e s t a t e b u d g e t and economicg r o w t h objectives(inSocio- EconomicDevelopmentPlan).Theimplementationof monetarypolicyis a l s o or ganizedbytheGovernments u c h asdeterminetheamounto f l i q u i d i t y t o b e i n j e c t e d i n t o t h e economy.TheGovernmenti s requiredtor e p o r t t h i s a c t i v i t y t o t h e N a t i o n a l A s s e m b l y , w h i c h t a k e s t h e responsibilityto supervisethemon etaryimplementation.
Baseo n t h e p l a n f r o m t h e G o v e r n m e n t a n d N a t i o n a l A s s e m b l y , t h e m a i n functionoftheSBVistop r e p a r e fort h e m o n e t a r y p o l i c y t o b e i m p l e m e n t e d throughmonetarypolicytoolsandundertaketheunifiedmanagementofallb ankingactivities.Therefore,legally,theprocessofmonetarypolicyformulation i s largely
The responsibility for monetary policy oversight lies not only with the State Bank but also with the National Assembly, the Government, and the National Monetary Policy Advisory Board These entities play crucial roles in supervising the State Bank's activities and setting objectives, which can limit the independence of monetary policies due to the strong involvement of the Government As noted by Radzyner and Riesinger (1997), central banking in transition economies in Central and Eastern Europe (CEEC) reflects these dynamics.
5)areindependentw i t h t h e G o v e r n m e n t r e g a r d i n g t h e f o r m u l a t i o n a n d i m p l e m e n t a t i o n ofm o n e t a r y p o l i c y sincetheearly1 9 9 0 s Withtheexcept ionof Poland,theCzechNationalBank,N a t i o n a l BankofH u n g a r i a n , Ba n k o f S l o v a k i a andB a n k o f Sloveniahavef o r m a l o b l i g a t i o n todesign m o n e t a r y p o l i c y separatelyt h o u g h importancechanges orproblemsareinfactdiscusseda ndjointlyr e s o l v e d withtheroleofGovernment.The researchthenconcludedthattheindependenceoft h e CentralBa n k c a n haveinfluen ceontheeffectivenessofitspolicies.
' Whenitc o m e s t o t h e goalsoft h e SBV,iti s s t a t e d intheLawoft h e Bankthati t wo ul d a i m a t s t a b i l i z a t i o n oft h e value oft h e currency,whichmeansstabilizationo f theex cha nge rateregime, c o n t r o l l i n g i n f l a t i o n ratea n d f a c i l i t a t i n g socio- economicd e v e l o p m e n t a m o n g s o m e othert a s k s A m o n g m u l t i - g o a l s , i t c a n beseen fromtheactualVietnamese e c o n o m i c policyth at e c o n o m i c growthsee ms tobethedefactoprimarygoalofthegovernmentCamen(2006).
TheS t a t e B a n k o f V i e t n a m ist h e c e n t r a l o f t h e m a c r o e c o n o m i c s po licyandi t conductsitsp o l i c y byu s i n g somem o n e t a r y policyt o o l s t o determ inethet w o annualt a r g e t s w h i c h aree x c h a n g e r a t e t a r g e t a n d t h e i n j e c t i o n o f totall i q u i d i t y (M2)andcredittotheeconomy.Thecontrolofmoneysuppl yisconductedthroughthefollowingimportanttoolsofmonetarypolicy:
Figure3.3:InterestrateinVietnamSo urce.SBVandWorldBankwebsite(2012,accessedonNovember10,2012)
1 9 9 0 s T h e p o l i c y o f positiverealinterestrate startedintheendof1992,whichhasbeenadjustedflexiblyinlinewithinflation rate.Th eStateBankofVietnamsetsthreemaininterestrates:Baserate,DiscountrateandRefinancin grate.
Thebaserateisstartedtobeannouncedasthereferencerateforotherinterestratesof thebankssinceAugust5‘,2000bythe DecisionNo.242/2000/QD-NHNNd a t e d
August2nd2 0 0 0 o f S B V H o w e v e r , t h i s r a t e i s k e p t quitec o n s t a n t f o r a l o n g periodo f time.Fori ns t a nc e , i t wasf i x e d atabout7.5%formorethan3yearsfrom2002to2005andthenkeptat8.25% fornearly3yearslaterwhileotherinterestrate hasf l u c t u a t e d s o much.F i g u r e 3.3showsthe base r a t e a n d t h e l e n d i n g rate f r o m August2 0 0 0 toAugust2012.I t seemsthatthegapbetweenbase rateandle nding
Thistooli s used s i n c e July2 0 0 0 i n th e w a y t h a t t h e S t a t e Bankt r a d e s s e c u r i t i e s withc r e d i t institutions T h e t r a d i n g o f s e c u r i t i e s i s o f t e n i n t h e f o r m o f a u c t i o n s byv o l u m e o r a u c t i o n s f o r i n t e r e s t r a t e T h e commons e c u r i t i e s i n t he t r a d i n g a r e Governmentb o n d s , StateB a n k b i l l s o r s e c u r i t i e s s e l e c t e d b y t h e S t a t e Bank In theverybeginning, o n l y short- termsec ur it ies a r e tradedb u t s i n c e 2003,securities withmoret h a n a yearm a t u r i t y a r e alsoa v a i l a b l e f o r a u c t i o n s R e c e n t l y , t h i s toolplaysanimportantr oleinadjustingthetotalliquidityinjectedintotheeconomy.
Thisisacertainfractionofthedepositsthatcommercialbanksarerequiredtokeptinaf o r m o f v a u l t c a s h t o r e d u c e t h e p o s s i b i l i t y ofb a n k crises.B y changingt h e re quirementrate,theStateBankcanchangetheamounto f m o n e y t h a t c o m m e r c i a l ba nksc a n i n j e c t t o t h e e c o n o m y a n d i n d i r e c t l y a f f e c t the m o n e y supplyi n Vi etnam.T h e r e q u i r e d r e s e r v e i s s e t f o r a l l t y p e s o f d e p o s i t s i n e i t h e r d o m e s t i c currencyo r foreignc u r r e n c y T h i s t o o l h a s be e n u s e d i n Vietnam s i n c e 1 9 9 1 andusedtobeanimportanttoolinthepart.However,intoday’senvironment ,theSBVprimarilyt a r g e t s i n t e r e s t r a t e s o r e q u i r e r e s e r v e b e c o m e r e l a t i v e l y l e s s i m p o r t a n ttool.
BaseonthedefinitionofIMF,theexchangerateregimeinVietnamcanbeconsidered asamanaged-floatingoneorintermediate(Vo,ei‹i/.(2001).Alongwith theeconomicreformst a r t s in1 9 8 6 , theexchangerateregimei n Vietnamh a s be e n switchedf r o m am u l t i p l e exchanger a t e s witht w o o f f i c i a l e x c h a n g e rate s5o a singlefixedratein1989administeredby theSBV.Sincetheunificationin1989,the
-32- exchangeratedetermination hasbecomemoremarket- oriented.In1991,asystemofanarrowbandadjustedaroundanofficialexchangerat eisestablishedmarkingthechangef r o m a p e g g e d exchanger a t e t o t h e m a n a g e d - f l o a t i n g one.B e s i d e s thedomesticcurrencyVND,theUSDisalsowidelyus edand thebilateralVND/
Chapterremarks
InrecentyearsVietnamhasappliedthegrowthmodelinwidth,relyingsomuchoncapit ali n v e s t m e n t , p a r t i c u l a r l y p u b l i c i n v e s t m e n t a n d t h e S O E s e c t o r , f o r a l o n g time.Thismodelleadstoatrade-offbetweengrowthand inflation,thatgrowthmustbeaccompaniedbyeffortstoexpandmonetarypolicyand averyhighpricetopayisthati n f l a t i o n a n d m a c r o e c o n o m i c i n s t a b i l i t y b e c o m e m o r e s e r i o u s , l e a d i n g t o a n
• inflationary spiral.Tocurbinflation,from2011Vietnamhasimplementedtighteningmonetaryp o l i c y As aresult,Vietnamh a s successfullycu r b e d inflation However,thee x p ec t e d c o n s e q u e n c e i s theb a n k i n g s y s t e m l i q u i d i t y t e n s i o n s , r i s i n g i n t e r e s t r ates,b a d d e b t s a n d o v e r d u e r a t i o o v e r t o t a l o u t s t a n d i n g loansi n c r e a s e d ; assetmarkets,includingthemarketsecuritie sandrealestatemarkets,severelyimpaired.Therefore,t h e d e e p s t u d i e s o n t h e m o n e t a r y p o l i c y i s t i m e l y a n d r e l e v a n t t o t h e currentcircumstanceofViet namasithelpspolicymakerstomanipulatethemonetarypolicyinorder to achievethemaintargetininflationandmacroeconomicstability.
Modelspecification
This thesis employs Vector Auto Regression (VAR) models to analyze the impact of monetary policy on output and inflation in Vietnam VAR models are advantageous as they can estimate the interrelationships among multiple endogenous variables simultaneously However, they do not rely on economic theory, which presents a limitation Given the lack of consensus regarding the monetary transmission mechanism in Vietnam, this methodology allows for minimal restrictions on how monetary shocks influence the economy, providing a distinct advantage The decision to use a VAR approach is further supported by a substantial body of empirical literature that includes similar studies discussed in Chapter X.
I h a v e p r e s e n t e d toe x a m i n e t h e monetaryt r a n s m i s s i o n m e c h a n i s m , w h i c h f o c u s e s primarilyo n reduced- formrelationshipsbetweenmonetarypolicy andoutputusingasmallnumberofvariables.
Modelestimationprocesswillbecarriedoutinthreesteps,inthefirststep,abasicre ducedformVARmodelwillbeestimatedwiththreevariablesoutputgrowth,consumerpriceindexandmoneysupplytoanalyzetheeffectsofchangesinmonetary
-34- policytotherealeconomy;inthesecondstep,thevariablesconsumerpriceindexoftheurba nandruralareaofVietnamwillbechangedalternativelytothebasicmodeltoexaminetheeffectsofc hangesinmonetarypolicytoinflationoftheurbanareaandtherural a r e a o f Vietnam T h e n , a t thef i n a l s t e p , different v a r i a b l e s l e n d i n g r a t e , domesticc re d i t an dexchangeratewillbeaddedalternativelyt o thebasemodeltoexaminetheiri n d i v i d u a l e f f e c t totheoutputg r o w t h andinflationo f theeconomy.Besidest h e
V A R , t h e D i c k e y F u l l e r t e s t isu s e d tot e s t fors t a t i o n a r i t y oft h e variables.
Dataavailabilityanddescription
Dataavailability
Becauseoftheavailabilityofthedata,themodelsinthisthesisareestimatedusingmo nthlydatafrom2005M5to2012M6tostudytheresponseofrealoutputgrowth , andinflationtodifferentmonetarypolicytools.
GROWTH:RealindustrialoutputgrowthofVietnami s usedas aproxyf o r outputgrowthoftheeconomy(GROWTH,1994based,measuredin%).
+ CPI:Consumerpriceindex(CPI,20050,measuredin0 + CPIUB:
These variablesare takenfromthewebsitesofInternationalMonetaryFund(IMF’sIFS)e x c e p t R e a l
CPIU B a n d C P I _ R R w h i c h aref r o m t h e w e b s i t e ofG e n e r a l StatisticsO f f i c e (GSO)andEiscalculatedbaseon abasketofexchangeratesofthetop25 countrieswiththelargesttradesharewithVietnam(import+export)
(IMF’sDOT,OECD.StatandU.S.FederalReserve).
Datadescription 4.2.3.Descriptiveanalysisofdata 4.3.Testforstationaryproperty
• GROWTH-[(OUTPUT,- O U T P U T , ; ) / OUTPUT,.;]x1 0 0 , i s p e r c e n t a g e changeo f RealI n d u s t r i a l O u t p u t , i s u s e d a s a proxyf o r o u t p u t g r o w t h o f th e economywhichiscalculatedbythe constantpricein1 9 9 4 Thereasonwhyrealindustrialoutputgrowthof Vietnami s usedi n s t e a d o f realGDPgrowthi s that
The data on the real output growth of Vietnam is not available for the entire study period Real output growth is preferred over nominal output growth because nominal figures are not adjusted for price levels, which have experienced significant fluctuations over time Consequently, nominal output growth does not accurately reflect true changes in output After adjusting for the Consumer Price Index (CPI), which is based on constant prices from 2005 and sourced from the General Statistics Office (GSO), real output growth provides a more accurate representation of output changes While there are various inflation measures, such as the GDP deflator, the State Bank of Vietnam (SBV) primarily uses the CPI as its main inflation indicator.
• Similarly,CPIU B (constantpricein2005)isusedasaproxyofinflationoftheurban areaofVietnama n d CPIR R (constantpricein2005)isuseda s aproxyofinfla tionoftherurala rea ofVietnamw h i c h a r e availableon thewebsiteso f Genera lS t a t i s t i c s Office( GS O)
• M2:Broadm o n e y o r high- poweredm o n e y , i t is thes u m o f moneya n d q u a s i - money,accordingtoIMFdefinition.
• LR(Lendingrate):The SBVhasco nt ro ll ed twol e n d i n g f a c i l i t i e s : thedisc ountrateandtherefinancingr a te Accordingt o thed i s c o u n t policy, t h e re financingratecanbese e n asthecei li ng andthediscountrateservesastheflo orrateandtogether they createabandforlendingratetomove.
Therefore,thelendingrateisusedinthisregressiontobeap r o x y ofinterestratechan nelasa t o o l ofmonetary policy.Therei s a l s o a b a s e r a t e t h a t iss e t b y t h e SBVa n d i t i s sometimesreferredtoasamonetarypolicytoolin
Vietnam,however, t h i s base interestr a t e h a s r a r e l y c h a n g e d o v e r t h e t i m e a n d d o e s n o t r e f l e c t t h e supplyofa n d demandfori n t h e moneymarket butservesa s ar e f e r e n c e rateforcommercialb a n k s t o s e t theird e p o s i t a n d l e n d i n g i n t e r e s t r a t e , h e n c e , i t i s o f littleimportancewhendoingmodel onVietnam’smonetarypolicy.
• CREDIT(Domesticcredit)iThisisoneofthechannelthroughwhichmonetary policycouldinfluenceachangeinoutputgrowth.Itisanimportantannual targetof theSBVdefinedbytheGovernment.TheneedforincludingDomesticcreditint h e s t u d y o f m o n e t a r y p o l i c y b a s e s o n t h e r e s e a r c h oft h e r o l e o f m o n e y supplyby Vo,etat.(2000).
(REER):TheRealEffectiveExchangeRateinthisthesisisusedasameasureofmonet arypolicythroughexc han ge ratechannel.Itis“ T h e weightedaverageofacountr y’scurrencyrelativetoanindexorbasketofothermajorcurrenciesadjustedforth eeffectsofinfiation.T h e weightsaredeterminedb y ' comparingtherelativet r a d e b a l a n c e s , i n t e r m s o f o n e c o u n t r y ’ s c u r r e n c y , w i t h e a c h o t h e r countryw i t h i n thei n d e x ” (http://www.investopedia.com/terms/r/ reer.asp#axzz2D
IM,EXand( I M +EX).a r eimportrevenueofthedomesticcountryfromtradi ngpartneri intimet,exportrevenueo f thedomesticcountrytotradingpartne ri intimetandtotalt r a d e betweent h e d o m e s t i c country andtradingpar tnerirespectivelyintimet. ôH ; ; ( I M ' ),H,—;(EX)a n d H ; — ;
(IM+E X ).w e totalexportsfromthedomesticcountrytoallthetradingpartnersintimet,tot alimportsofthedomesticcountryf r o m a l l t h e t r a d i n g p a r t n e r s i n timet a n d t o t a l t r a d e b e t w e e n t h e domesticcountryandallthetradingpartnersrespectivelyintim et.
• ºº'ºt-consumerpricesindexoftradingpartneriintimet. ằCPI"”t.-cons ume r price sindexofthedomesticcountryintimet. ằE ' t- i stheexchangerateindexforcurrencyiintimet(constantrateinbasetime)exp ressedasdomesticcurrencyperforeigncurrencyunit:E'—-(
- exchangera te betweend o m e s t i c currency a n d currencyo f countryi inti met(domesticcurrenciesin1foreigncurrency).
REER>1 :D o m e s t i c currencyisassumedtobeatlowp r i c e andforeigncurren ciesa t h i g h p r i c e , d o m e s t i c g o o d s a n d s e r v i c e s a r e c h e a p e r , n e t e x p o r t increase,tradebalanceimproves.
REER< 1 : Domesticc u r r e n c y i s a s s u m e d t o b e a t h i g h p r i c e a n d f o r e i g ncurrenciesatl o w p r i c e , foreigngoodsandservicesarec h e a p e r , netex portdecrease,tradebalanceworsens.
TocomputetheREERIwillhavetoidentifythefollowing:therangeofforeigncoun triestobecoveredastradingpartners,theirrelativetradeweightsandthepriceindicestobecompared. Detailsarepresentationin5followingsteps:
Step1:Baseon thedataofVietnam’simportandexportrevenuewithcountriesintheworldavaila blefromwebsiteIMF'sDOTintheperiod2005M5-
2012M6(about40countries h a v e tradesh are significantlyw it h Vietnam), I picko u t 25tradingpartnershavethelargesttradesharewithVietnam(Accountin gformorethan8 6 % o f t h e t o t a l i m p o r t a n d e x p o r t r e v e n u e o f V i e t n a m w i t h t h e w o r l d , accordingtothestatisticalresultsintheAppendix1)forREERcalculati on.
Step2:Calculatetradeweightedi n d e x ofeachtradingpartnersa c c o r d i n g toth eformula(4.3).Baseo n thed a t a ofimport a n d e x p o r t revenueo f Vietnamw i t h tradingp a r t n e r s availablefromw e b s i t e
2012M6,IcalculatedtotaltradebetweenVietnamandtradingpartnersrespectivelyintimet(7i, +EX),andtotaltradebetweenVietnamandallthetradingpartnersrespectivelyintimet(H,- iHt +*×'#).ThenIcalculatedtradeweightedindexof thetradingpartners(totaltradeweightforeachtradingpartner)accordingtothe formula(4.3).
Step3:Conversionofconsumerpricesindexof tradingpartnersandVietnamtothesamebasetime2005M5andthencalculatetheeff ectiverelativepriceindices(inthisinstance theweightedc o n s u m e r pricei n d e x oftradingpartnersa n d theconsumerpriceindexofVietnam)=CPI7 CPI.
Step4:Conversiontheexchangeratebetweenc u r r e n c y o f eachtradingpartn erandUSD( t r a d i n g p a r t n e r c u r r e n c y i n 1 USD)i n t o thee x c h a n g e r a t e b etween domesticcurrencyandcurrencyofeachtradingpartner(VNDin1tradingpartnercur rency),a n d thenc a l c u l a t e e x c h a n g e r a te i n d e x f o r currencyo f eachtradi ngpartnere x p r e s s e d a s d o m e s t i c c u r r e n c y p e r t r a d i n g p a r t n e r c u r r e n c y u n i t w i t hconstantrateinbasetime=(e')"baxe