Nguyen Thi Thanh Huyen 2012 02 27 6 MINISTRY OF EDUCATION AND TRAINING UNIVERSITY OF ECONOMICS, HO CHI MINH CITY FULBRIGHT ECONOMICS TEACHING PROGRAM Nguyen Thi Thanh Huyen IS INFLATION TARGETING APPR[.]
MINISTRY OF EDUCATION AND TRAINING UNIVERSITY OF ECONOMICS, HO CHI MINH CITY FULBRIGHT ECONOMICS TEACHING PROGRAM - Nguyen Thi Thanh Huyen IS INFLATION TARGETING APPROPRIATE FOR VIETNAM? MASTER IN PUBLIC POLICY DISSERTATION Ho Chi Minh City, 2012 123doc MINISTRY OF EDUCATION AND TRAINING UNIVERSITY OF ECONOMICS, HO CHI MINH CITY FULBRIGHT ECONOMICS TEACHING PROGRAM - Nguyen Thi Thanh Huyen IS INFLATION TARGETING APPROPRIATE FOR VIETNAM? Public Policy Major Code: 603114 MASTER IN PUBLIC POLICY DISSERTATION SUPERVISOR Dr JONATHAN R PINCUS Ho Chi Minh - 2012 123doc i CERTIFICATION I certify that I wrote this thesis myself I certify that the study has not been submitted for any other degrees I certify that any help received and all sources used have been acknowledged in this thesis with the best of my knowledge The study does not necessarily reflect the views of the Ho Chi Minh City Economics University or Fulbright Economics Teaching Program Author Nguyen Thi Thanh Huyen 123doc ii ACKNOWLEDGEMENTS This master of public policy dissertation could not be completed if I have not received the help and encouragement from many people First, I am very grateful to my supervisor, Dr Jonathan R Pincus, who kept an eye on the progress of my work and was always helpful when I need his advice His advices, supports, criticisms and comments helped me to deeply understand the overall knowledge related my dissertation I also convey a special thank to Dr Vu Thanh Tu Anh, the first teacher who encourange me to begin this dissertation and many other teachers that were always support me during the time I studied in Fulbright Economic Teaching Programme I gratefully acknowledge the financial support of FETP, without which this dissertation would not have been done I also express my thankfulness to my colleagues in the Monetary Policy Department, State Bank of Vietnam who are very helpful and enthusiastic colleagues, for their sharing experiences and data to complete the dissertation I also would like to convey special thanks to Mr Nguyen Xuan Thanh, Mrs Nguyen Thi Kim Chau, Mr Tran Thanh Phong, Mr Tran Thanh Thai, Mr Truong Minh Hoa and Ms Hoang Ngoc Lan, who assisted me a lot of things in terms of adminstration to stabilize the study here At the same time, I owe a large debt of gratitude to my parents and mother-inlaw, who helped to arrange family works for me to study Last, I thank my husband and daughters for their patience and support for me 123doc iii CONTENTS CERTIFICATION i ACKNOWLEDGEMENTS ii CONTENTS iii ABBREVIATIONS v LIST OF GRAPHS vi LIST OF TABLES vii ABSTRACT viii CHAPTER 1: INTRODUCTION CHAPTER 2: THEORETICAL AND EMPIRICAL OVERVIEW ON I.T 2.1 Conceptual framework 2.1.1 Supporting ideas for I.T 2.1.2 The model of I.T 2.1.3 Issues in the implementation of I.T 2.2 Global evidence on I.T adoptation 2.2.1 Evidence supporting I.T 2.2.2 Evidence against I.T 2.3 The prerequisites of I.T 10 2.4 Experiences of inflation targeters 12 2.4.1 Experiences of industrial country inflation targeters 12 2.4.2 Experiences of developing country inflation targeters 14 2.4.2.1 Chile 16 2.4.2.2 South Korea 18 2.4.2.3 Brazil 20 CHAPTER 3: THE MONETARY POLICY FRAMEWORK IN VIETNAM 23 123doc iv 3.1 Independence of SBV 23 3.2 Monetary policy implementation in Vietnam 23 3.2.1 Monetary instruments 24 3.2.2 Monetary policy transmission mechanism 25 3.2.3 The strategy of monetary policy 26 3.2.4 Monetary policy effectiveness 30 CHAPTER 4: TESTING I.T PREREQUISITES FOR VIETNAM 33 4.1 Economic structure 33 4.1.1 A small, open economy with liberalized capital and trade 33 4.1.2 Dollarization and goldization 35 4.1.3 Exchange rate pass-through effect 36 4.2 Health of the financial system 37 4.3 Analytical capability of SBV 39 4.4 Central bank independence 39 CHAPTER 5: CONCLUSION AND RECOMMENDATIONS 43 5.1 Conclusion 43 5.2 REER monetary policy framework is also problematic 44 5.3 Recommendations 45 REFERENCES 47 123doc v ABBREVIATIONS ADB Asian Development Bank CBI Central Bank Indepedence CPI Consumer Price Index FCD Foreign Currency Deposits FDI Foreign Direct Investment Fed Federel Reserve System FII Foreign Indirect Investment GDP Gross Domestic Products GSO General Statistics Office I.T Inflation Targeting IFS International Funds Statistics IMF International Monetary Fund MoF Ministry of Finance NCM New Concensus Macroeconomics NEER Nominal Effective Exchange Rate OECD Organization for Economic Coorperation and Development OLS Ordinary Least Square RER Real Exchange Rate REER Real Effective Exchange Rate SBV State Bank of Vietnam U.K United Kingdom USD United State Dollar VAR Vector Autoregression VND Vietnam Dong WB World Bank 123doc vi LIST OF GRAPHS Graph 3.1: Velocity of money in Vietnam 29 Graph 3.2: CPI, M2 and GDP growth rate of Vietnam 31 Graph 3.3: REER, NEER and Relative CPI of Vietnam 32 Graph 4.1: Trade deficit and openness of Vietnam economy 34 Graph 4.2: Capital inflow structure in Vietnam 34 Graph 4.3: USD/VND Exchange Rate 35 Graph 4.4 : Dollarization in Vietnam 36 Graph 4.5: Stock market capitalization in some countries 38 Graph 4.6 : Bond market development in Vietnam 38 Graph 4.7: Seigniorage to GDP in Vietnam 40 Graph 4.8: Real deposite rate in Vietnam 41 Graph 4.9: Fiscal balance to GDP in Vietnam 42 123doc vii LIST OF TABLES Table 3.1: Exchange rate adjustment milestones of SBV 28 Table 3.2: Total reserves in months of imports in Vietnam 28 123doc viii ABSTRACT Monetary policy is one of the most crucial macroeconomic policies in an economy in general and in Vietnam in particular Considering the low effectiveness of monetary policy in Vietnam, many economists think that inflation targeting (I.T) is a best choice for the future The dissertation takes a comprehensive look at the I.T framework in theoretical and empirical terms, the conditions as well as the global experiences in industrial and developing countries In theory, the I.T model does not mention other determinants of inflation such as real shocks, exchange rate movements and fiscal roots It is surprising that although I.T is applied nearly everywhere but not all countries are successful and I.T is often not the key determinant of success Other factors are also important, such as fiscal descipline, the economic structure, financial system strength, central bank indepedence and political support for the inflation target The disseration also tests the conditions of Vietnam using some prerequisites for I.T suggested by the IMF and finds that Vietnam is not suitable for this framework because the country’s economic characteristics include a weak financial system and a lack of central bank indepedence Although the experience in some successful countries like Chile and South Korea show that those conditions are not wholly met in these countries, at least Chile and South Korea had good fiscal discipline and central bank independence In Vietnam, fiscal dominance exists with continuous fiscal deficits Thus, to improve the prevailing monetary policy framework, I.T may not be the best choice for Vietnam REER targeting is an alternative but it is also problematic Vietnam is a highly open economy with a high pass-through effect and dollarization The dissertation recommends that at first Vietnam should improve institutional conditions for monetary policy and strengthen financial markets, and at the same time restructure the economy and impose fiscal discipline on the government Then choosing I.T or REER targeting or another monetary framework will depend on political considerations and the desired balance between growth and price stability 123doc ... dynamics for me to carry out this dissertation to answer the following questions: First, is inflation targeting (I.T) appropriate for Vietnam? Why and why not? And second, what are the implications for. .. where Yg is the output gap R is nominal rate of interest p is rate of inflation pT is inflation rate target RR* is the “equilibrium” real rate of interest, that is the rate of interest consistent... The result is overheating and inflationary pressure on the economy Second is the time-inconsistency problem A common way for making policy decisions is to assume that expectations are formed at