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STATE BANK OF VIETNAM HO CHI MINH UNIVERSITY OF BANKING SUMMARY OF DOCTORAL DISSERTATION MAJOR: FINANCE - BANKING Code: 9.34.02.01 SPILLOVER EFFECTS OF THE US MONETARY POLICY ON THE MARKETS OF ASEAN COUNTRIES Ph.D Student : Nguyen Van Dan Academic title and full names of supervisors: Dr Le Van Hai Dr Ton That Vien HO CHI MINH CITY - 2022 CHAPTER I: INTRODUCTION 1.1 RATIONALE FOR THE STUDY The spread of market turbulence from one nation to another is referred to as the spillover effect (Abou-Zaid, 2011) Governments and monetary agencies all around the world now face difficulties as a result of this Fiscal, quasi-fiscal, and particularly monetary policies, when implemented in one nation, can easily have a domino impact (spill effects) on the rest of the world The number and complexity of shock transmission routes have both risen There have been numerous studies analyzing the monetary policy's spillover effect from established markets to other markets, but none have examined this phenomena for the market segment of emerging countries development, Vietnam included Instability on a global scale, according to Park (2013), might pose a serious threat to the development and future of Asian nations In particular, Southeast Asian nations and the United States, which dominates trade and investment, have tight economic relations In order to create appropriate policies, Kawai (2015) highlights that policymaker in these nations need to have a thorough understanding of spillovers Additionally, there are constraints in the general data analysis for the emerging market that include rich and developing countries in the same sample, such as the significant disparities in income imports and policy features between nations The factors that go into the analysis of spillovers are also very different because most studies only consider factors like interest rates, inflation, output, exchange rates, and asset prices, which only causes a small number of spillovers and does not fully take into account all of the different ways that spillovers can affect both the real economy and financial markets Furthermore, the transmission mechanism of the monetary policy spillover effect through various channels has not been particularly highlighted in many studies The success of a country's economic development is increasingly influenced by US monetary policy, which also has an impact on regional and global financial markets Any modification to US monetary policy has a cascading effect that affects the discount rate, exchange rate, trade, and investment policies, influencing the overall economic climate macroeconomics As a result, it is crucial to examine the swings in the market as well as the macro risks that the real economy and ASEAN's developing nations face as a result of the effects of the US monetary policy shock Above all, since the research findings are based on scientific underpinnings that are applicable to both practice and reality, it is crucial to comprehend how the US monetary policy affects these economies It is crucial to assist in the analysis, evaluation, and planning of managers' policies as a theoretical foundation The study also suggests a fresh framework for analysis as a guide for future work in this area The analysis has made the author aware of the necessity for more research on the topic of the spillover effect of foreign monetary policy in order to resolve pertinent issues In light of this, the author decides to write on "Spillover effects of the US monetary policy on the markets of ASEAN countries." scope for the expanding ASEAN countries market from 1st quarter, 2008 – 4th quarter/2019 1.2 AIMS OF STUDY This study is aim to construct models to investigate the effects of US monetary policy on ASEAN's developing-nation markets In order to reduce the detrimental effects of US monetary policy on the markets of these nations, the analysis makes a number of policy recommendations based on this information 1.3 RESEARCH QUESTIONS The thesis responds to the following research questions in order to achieve the research goals: What are the characteristics of the US monetary policy and the economic ties between the US and ASEAN countries throughout the research period? Is the US monetary policy's impact on the financial market and actual economy of ASEAN nations statistically significant or not? What are the size and direction of the US monetary policy's indirect effects on the financial market and actual economies of ASEAN nations? What are the possible policy repercussions to reduce the adverse impacts of the US monetary policy spill on the ASEAN market? 1.4 SUBJECT AND SCOPE OF THE STUDY Subject of the study: The study focuses on the relationship between the factors that represent US monetary policy and the factors that are associated with the real economy of ASEAN countries Scope of the study: The research topic is based on sample data collected on the United States and ASEAN developing countries, namely Indonesia, Malaysia, Philippines, Thailand and Vietnam The research content of the thesis only focuses on the aspects of financial market and the factors of the real economy of ASEAN countries from 1st quarter, 2008 – 4th quarter/2019 1.5 METHODS In this study, the author uses a combination of qualitative and quantitative research methods to find suitable answers to the research questions of the thesis, specifically: Qualitative research method: Methods of systematization, generalization and synthesis to carry out research overview to establish the theoretical basis of the thesis Comparative, analytical and inductive methods are used to interpret and draw conclusions about the research object; finally, interpolation and extrapolation methods are used to make recommendations and policy implications for policy makers in ASEAN countries Quantitative research method: It is carried out through building a quantitative model to evaluate and measure the spillover effects from the US monetary policy on the financial market and the real economy of ASEAN(5) countries Research using E-view software to process data; The testing of hypotheses is based on the VAR estimation technique 1.6 CONTRIBUTIONS OF THE THESIS Scientific significance: Most of these studies have not analyzed the spillover effects through the mechanism leading to the spillover effect of different channels There are very few studies disaggregated by channels, so the factors in the analysis of international monetary policy spillover effects of previous studies are not really complete and cover all aspects that need to be considered Therefore, the author's testing of spillover effects from US monetary policy to ASEAN countries with a fuller number of impact channels including channels will help provide empirical evidence and have more in-depth assessment of the international monetary policy spillover effect In which, in addition to channels such as exchange rate channel, financial channel and aggregate demand channel, the author's analysis of monetary policy spillover effect through the addition of two channels is portfolio balance channel and financial growth channel may contribute an additional research dimension to existing studies Most of the studies mainly focus on analyzing spillover effects from monetary policy of developed countries and regions to emerging markets, however, no studies have been conducted to test specifically for the group of countries developing countries in ASEAN, including Vietnam Therefore, the topic will add more empirical evidence on the spillover effect of international monetary policy to the countries in the above group in the period 2008 - 2019 Along with that, separating Vietnam into a bloc will helps to have a deeper insight into the relationship between the Vietnamese market and the world market The thesis has summarized and analyzed the theoretical basis for measuring the factors of the international monetary policy spillover effect The author presents in detail the definition and measurement methods At the same time, the topic systematizes and analyzes the development of background theories as well as summarizes the important experimental research results of authors in the world and in Vietnam Therefore, the study will become a suitable reference for those interested in the spillover effects of international monetary policy Practical significance: The research results on spillover effects from the US monetary policy on the markets of ASEAN countries will fill the gap in the scientific basis Help policymakers understand more deeply about the spillover from US monetary policy to their country's economy to establish appropriate solutions and policies to promote market integration and development financial as well as the economy of each country In addition, investors as well as international administrators can also refer to the results as a source of information to support decisions when investing, connecting trade with the markets of ASEAN countries 1.7 ORGANIZATION OF THE THESIS In addition to the introduction, conclusion, list of published works, list of references, appendices, the thesis includes chapters : Chapter 1: Introduction Chapter 2: Literature Review Chapter 3: Research Methodology Chapter 4: Results and discussion Chapter 5: Conclusion and implications CHAPTER 2: LITERATURE REVIEW 2.1 DEFINITIONS 2.1.1 Monetary policy anh the spillover effect of monetary policy The term "spillover effect" refers to how market swings move from one nation to another (Abou-Zaid, 2011) According to Dornbusch and Claessens (2000), spillover refers to the spread of market fluctuations from one country to another, a process observed through declines in stock prices, exchange rates or capital flows Numerous studies on the monetary policy spillover effect have been conducted up to this point Because the real economy is included as well as elements related to the financial sector in the analysis and evaluation of the spillover impact The concept of the "spill effect" of monetary policy, which is the impact of one country's monetary policy on macroeconomic variables in other nations including output, inflation, interest rates, exchange rates, stock prices, etc., is used in the thesis as a result The general idea of international monetary policy spillovers began with the pioneering works of Mundell (1963) and Fleming (1962), and was later extended by Dornbusch (1976), showing the different channels through which externalities can be transmitted from one country to another The two basic predictions of the Mundell-Fleming-Dornbusch models are the Expenditure-shifting effect and the Expenditure-increasing effect as channels of international monetary policy spillovers The first argument states that a country's monetary easing leads to a devaluation of the exchange rate, which leads to an improvement in the balance of trade and an increase in domestic output at the same time have the opposite effect for partner countries The second argument posits that the same monetary easing would increase domestic demand (through consumption and investment spending), increase domestic imports (which are the country's exports to the country partners), causing the domestic trade balance of the host country to deteriorate and will have the opposite effect on the partner countries 2.1.2 Related theories of monetary policy spillover effect 2.1.2.1 Mundell - Fleming model The supply of imports is completely elastic at a given price in foreign currency, and the supply of domestic output is perfectly elastic at a given nominal price in a small country that is subject to particular global interest rates Expanding monetary policy's effects causes a decline in exchange rates, a rise in domestic demand for goods and income, a fall in interest rates and capital outflows, and a trade surplus 2.1.2.2 Model of exchange rate reactions to interest rate changes There may be a difference between domestic and international interest rates; Foreign and domestic securities can be used interchangeably; the degree to which currency expansion results in a decline in the spot rate in comparison to the anticipated rate; The elasticity of expectation is less than in the short term and equal to in the long run Impact of monetary policy that is expansionary: The declining spot rate raises the anticipated deposit in the short term while decreasing the domestic interest rate over the long run restrict the impact of exchange rate fluctuations on interest rates; The influence on the shortrun trade balance of a decline in the spot exchange rate on domestic output depends on the elasticity of expectations 2.1.2.3 Model of exchange rate expectations and total spending The full weighing of the trade impact provisions on the revenue absorbed by the offset decrease in saving; The fact that trade flows only respond to fixed rates; The reason for the short-term effect, as opposed to the long-term effect, is that the indicator models have been fully adjusted to changing trade terms Expanding monetary policy's effects reductions in spot rates, capital outflows, and interest rates based on specific incomes; The elasticity of expectations will have a significant impact on how the expansion of monetary policy affects the short-term trade balance 2.1.2.4 The theory of interest rate parity (IRP) Interest rate parity (IRP) is the equilibrium that results when market forces cause interest rates and exchange rates to vary, rendering hedged arbitrage ineffective The difference in interest rates between the two countries exactly balances out the difference between the forward rate and the spot rate between the two currencies in this equilibrium Ngoc Tran Tho (2005) Domestic and overseas interest rates are distinct from each other Two classes of constitutive factors are to blame for the situation (1) National characteristics, or national premiums; and (2) monetary characteristics, or currency risk premiums Ocampo et al (2009) assert that capital flows halt when interest rate parity, or when the domestic return equals the external rate of return, happens In theory, capital will be moved to the location with a greater return if there is ever a shift in the domestic return and the external return out of phase 2.1.2.5 The International Fisher Effect According to the international Fisher effect theory, when foreign interest rates are lower than domestic interest rates, foreign currencies will increase By increasing foreign returns for domestic investors, this appreciation will bring foreign returns closer to those of domestic assets When the international interest rate is higher than the domestic interest rate, on the other hand, the value of the foreign currency will decrease From the perspective of domestic investors, this drop will lower the return on foreign securities, resulting in the return on international securities being equal to the return on domestic securities (Tran Ngoc Tho, 2015) 2.1.3 Channels for monetary policy's spillover effects 2.1.3.1 Exchange Rate channel The domestic interest rate in the host nation will be lower than the foreign interest rate when monetary policy is loosened, and the value of the home currency will also decline This will improve the nation's trade balance (balance between imports and exports) and thus raise national output Additionally, the aforementioned move will have an impact on the output and trade balance of this country's trading partners (Ammer et al., 2016) 2.1.3.2 Financial channel According to Punzi et al (2017), unconventional policies can influence asset prices by boosting investor confidence and increasing risk appetite (relaxing monetary policy in closed developed economies role in promoting risk-averse investors to invest more in Asian equity and bond markets) When monetary policy is eased, it reduces long-term yields and increases other asset prices in the host country, increasing asset prices in foreign economies (Ammer et al., 2016) 2.1.3.3 Aggregate demand channel When monetary policy is relaxed, this raises domestic demand (via spending on consumption and investment in the host country), which raises the imports of the host country and thus raises the host country's import value (Ammer et al., 2016) 2.1.3.4 Portfolio rebalancing channel Quantitative easing entails the purchase of long-term assets, typically long-term government bonds and mortgage-backed securities, according to Lavigne et al (2014) and Fratzscher et al (2013) Due to investors' shift to riskier assets in search of higher risk-adjusted returns, there is a consequent decrease in the availability of such assets to private 17 3.2 VARIABLE MEASUREMENT AND SOURCES OF DATA The model's variables are based on theoretical precepts and empirical research The topic of data selection for study variables in the model is quarterly because the effects of monetary policy's activities on the objectives of the economy as well as the spillover effects of monetary policy are frequently lagged In time series data analysis, quarterly data collection aids in ensuring a sufficient data base and timely shock response analysis Secondary data sources include the IMF, ADB, Thomson Reuters, and national central banks; Variables are measured as follows: - Policy interest rate (IR): The Federal interest rate is the common interest rate for the United States, but during the post-crisis period (2008), the country frequently kept this interest rate very low, almost equal to zero, while frequently using unconventional monetary policy tools (quantitative easing program) to aim for controlled long-term interest rates In order to reflect US monetary policy, the author opts to use 10-year Treasury yields (in years) For the ASEAN(5) nations, annual policy rate calculations are made using data gathered from the national central banks - GDP: The output value growth variable is determined by deducting the output value of year t from the output value of year t-1 (this quarter relative to the same period last year), then dividing by the output value of year t-1 - Inflation (CPI): To determine the inflation rate, divide the current quarter's price index by the same quarter's price index a year ago, then deduct - Money supply (M2): The variable is calculated by dividing the money supply value in year t-1 by the money supply value in year t-t, then subtracting the value of the money supply in year t from the value of the money supply in year t-1 (this quarter in the same period last year) 18 - Exchange rate (EX): The nominal exchange rate for this quarter is subtracted from the nominal exchange rate for the previous quarter, which is divided by the nominal exchange rate for the prior quarter - Equity prices (EQ): The stock price variable is calculated by taking the Logarithm [the stock index at the end of this quarter divided by the stock index at the end of the previous quarter] - Exports (EXP): The export growth variable is calculated by subtracting the export value of year t from the export value of year t-1 (this quarter is the same period of the previous year) divided by the export value of year t-1 - Imports (IMP): The import growth variable is calculated by subtracting the import value in year t from the import value in year t-1 (this quarter in the same period last year) divided by the import value in year t- - Trade balance (TB): The trade balance variable is calculated by taking the Logarithm [export value of this quarter divided by the value of imports in the same quarter] - Portfolio inflows (FPI): Portfolio inflows is calculated by dividing the nominal capital flow value by the output value (same quarter) in year t - Bank credit (CPS): Credit growth is calculated by subtracting Claims on the private sector sales in year t from private sector loan sales in year t-1 (this quarter is the same period last year) divided by private sector loan sales in year t-1 Table 3.1: Definition of research variables and data sources Abbrevi Variables -ations IR Policy interest rate Data sources References - (US): Ammer (2016) Gupta ((2017), IMF (2019) - (ASEAN5) Ganelli et al (2016), Central banks Jacinta Bernadette et al (2017), (2019) Punzi et al (2017) Phạm Thị Tuyết Trinh (2019) 19 Fratzscher et al (2014), Bhattarai et al (2015), Ammer et al (2016), Thomson Punzi et al (2017), Ganelli et al Reuter 2019) (2016), Dekle (2017), Iacoviello ADB (2019) (2018), Phạm Thị Tuyết Trinh (2019) Bhattarai & Chatterjee (2015), IMF (2019) Ganelli and Tawk (2016), Dekle (2017), Phạm Thị T Trinh (2019) Bhattarai et al (2015), Apostolou et al (2013), Ganelli and Tawk IMF (2019) (2016), Punzi (2017); Phạm Thị Tuyết Trinh (2019) Apostolou et al (2013), Bhattarai et al (2015), Ammer et al (2016), IMF (2019) Ganelli et al (2016), Gupta et al (2017), Dekle (2017), Iacoviello et al (2018) Apostolou et al (2013), Fratzscher Thomson et al (2014), Bhattarai et al (2015), Reuter (2019) Ammer (2016), Gupta et al (2017), Rohit & Dash (2018) Dahlhaus et al (2014), Ganelli et al ADB 2019) (2016), Punzi et al (2017) Bowman et al (2015), Georgiadis IMF (2019) (2015), Ammer et al (2016) Bowman et al (2015), Georgiadis IMF (2019) (2015), Ammer et al (2016) GDP Gross domestic product M2 Money supply CPI Inflation EX Exchange rate EQ Equity prices FPI Portfolio flows EXP Exports IMP Imports TB Trade Balance IMF (2019) Ammer & et al (2016) CPS Bank credit ADB 2019) Ganelli et al (2016) Dekle (2017) 20 CHAPTER RESULTS AND DISCUSSIONS The results on spillover effects from the US monetary policy to ASEAN(5) countries including Vietnam are analyzed in two aspects; (i) spillovers to the real economy and (ii) spillovers to financial markets The spillover effect from the US monetary policy to the real economy of ASEAN(5) countries The analysis results show that there is a positive correlation between output and inflation in ASEAN developing countries with the US monetary policy during the research period The above results are contrary to the hypothesis as well as the studies of some authors such as Ammer et al (2016), Ganelli and Tawk (2016), Iacoviello & Navarro (2018) The ASEAN developing countries in the economic region are considered dynamic, with high growth rates However, these regional economies began to suffer from the 1997 currency crisis, and the subsequent far-reaching effects of the 2008 global financial crisis that made these countries vulnerable faced with the fact that the economic growth rate slowed down and the inflation rate increased Therefore, in order to restore the growth rate of the economy as well as control inflation, besides the implementation of monetary policy, there is also support from fiscal policy and some administrative policies Therefore, the analysis results of spillover effects from the US monetary policy to these countries are overwhelmed and not as expected The results of the analysis of the correlation between Vietnam's output and inflation and US bond yields are in line with expectations, and are consistent with the research results of authors such as Ganelli and Tawk (2016), Ammer & ctg (2016), Iacoviello & Navarro (2018) This can be explained, Vietnam is a country with large and close economic and investment relations with the United States, along with that, after the opening period of the economy, our country has stepped up to take 21 advantage of the economic benefits from the economic sector with foreign investment Therefore, when the United States loosened monetary policy to stimulate the economy, Vietnam has increased strongly to attract foreign investment flows thanks to its attractiveness, stability and high growth potential economy, at the same time, the above result is due to the increase in Vietnam's exports to the US market due to increased demand when this country implements monetary easing to increase output (GDP_vn); and the trade-off in increasing output led to rising inflation The spillover effect from the US monetary policy to the export growth of ASEAN countries (EXP_a) has a positive sign and is statistically significant, this result is contrary to the expectation of the sign, the above finding supports the obtained result found in the study of Ammer et al (2016) The above results can be explained when the US loosens monetary policy, leading to the devaluation of the dollar in terms of purchasing power correlation, this ability will be reduced and the US imports will decrease and vice versa In this case, the aggregate demand channel is overwhelmed by the exchange rate channel) In the current context that the United States is a partner with large trade relations with ASEAN countries, the fluctuation of US imports will cause the export growth of ASEAN countries to have the same influence Vietnam's export growth response to US monetary policy has been as expected in the short term, and contrasts with the results found for developing ASEAN countries At the same time, the above results also not support the results found in the study of Ammer et al (2016) The above results are explained, when the United States implemented monetary easing, increasing the demand for imported goods, with its position as a surplus exporter to the large US market, it helped increase Vietnam's exports Male In recent years, China has continuously strongly 22 devalued the renminbi to increase the competitiveness of export goods, which also partly created pressure on the exchange rate forcing the central bank of Vietnam to devalue VND to contribute to stabilizing competitiveness picture of goods The spillover effect from the US monetary policy to the financial markets of ASEAN(5) countries Policy interest rates of the ASEAN countries in the sample and Vietnam move in the same direction as long-term US interest rates Specifically, when the US long-term interest rates increase, the policy interest rates of these countries react to increase and vice versa This result is found similar to Pham Thi Tuyet Trinh et al (2019), the study on the monetary response of Asia and Vietnam to the spillover effects of the Chinese monetary policy, and the study of Punzi & Chantapacdepong (2017) The results also imply that the central banks of the above countries have lost their complete independence in the construction of their monetary policy In other words, the monetary policy of these countries is difficult to "isolate" completely from the monetary policy of the United States The reaction of the exchange rates of ASEAN countries (EX_a) and Vietnam (EX_vn) is in the same direction as the US long-term yields, the above results are consistent with the hypothesis and support the results found in previous studies including Ganelli and Tawk (2016), Ammer et al (2016), Punzi & Chantapacdepong (2017) The above results can be explained, when the US loosens monetary policy causing the dollar to depreciate, when the dollar depreciates through the law of interest rate parity, it will affect the exchange rate of ASEAN and Vietnam fell In particular, the reaction of the Vietnamese exchange rate to the monetary policy shock of the United States is stronger than that of developing ASEAN countries because the United States is a very large 23 trading partner of Vietnam According to Apostolou, Apostolos et al (2013) argued that countries are more closely linked to the US economy will have greater volatility The results show that stock prices of ASEAN countries (EQ_a) and Vietnam (EQ_vn) react positively to US monetary policy This result is consistent with the research hypothesis as well as the results found in the studies of Gupta et al (2017), Bhattarai & Chatterjee (2015) and Punzi et al (2017) The above results are explained, when the US Central Bank implements expansionary monetary policy, the US stock price (EQ_us) increases With the role of the US as the world financial center, as well as the deeper and deeper level of financial integration from ASEAN(5) countries into the global financial system, the shocks from the financial markets The United States will greatly influence the financial markets of these countries In addition, when long-term yields decrease, investors also accept a higher level of risk to invest in assets in the markets of countries including ASEAN(5), so the positive impact to the stock markets of these countries The estimated coefficient of the variable IR_us10 represented in the regression equation of FPI_a is statistically significant and has a negative sign The results are consistent with the hypothesis and support the results found in the study by Punzi et al (2017) The above results can be explained that when the US Central Bank implements expansionary monetary policy (reducing IR_us10, through long-term asset purchases), reducing the supply of assets to private investors, increasing demand for alternative assets in emerging countries Together with the increase in inflation in the US, it has contributed to the movement of portfolio capital to markets other than the US, including the ASEAN markets for higher risk-adjusted returns Contrary to the analysis of ASEAN countries, the analysis of the response of FPI_vn to the US monetary policy is positive 24 and contrary to the hypothesis After a period of strong growth and peaking in 2007, Vietnam's stock market began to decline due to the impact of a series of unstable macro factors that reduced the market's attractiveness Besides, policies on controlling capital flows of Vietnam's portfolio are also heavily administrative in nature Therefore, the volatility of portfolio capital flows is influenced by both market factors and policy factors, causing the estimation results to fail to meet the expectation of the sign The results of the study are somewhat similar to those found in the study by Ganelli and Tawk (2016) Analysis of the response of credit growth in ASEAN countries (CPS_a) to the US monetary policy shock is in the same direction and contrary to the hypothesis However, in fact, credit activities in the analyzed ASEAN countries depend not only on market factors but also on the intrinsic characteristics of the economy as well as policy factors Therefore, the regression results are different from the expectation The above results are also contrary to the analysis results of CPS_vn's response to the US monetary policy shock The results on the response of CPS_vn to the US monetary policy shock can be explained, when the US dollar depreciates causing the nominal exchange rate of Vietnam to decrease Then, a loan in a foreign currency is converted into the local currency, the value of that debt is reduced when calculated according to the local currency value for the borrower; Vietnam is characterized by the fact that importers also tend to borrow foreign currency to meet payment needs, so this action will boost credit demand and credit value of borrowers Along with that, due to the correlation in interest rates, Vietnam's financial conditions are eased (lower interest rates), which encourages banks to increase credit expansion 25 CHAPTER CONCLUSION AND IMPLICATION 5.1 CONCLUSION The findings indicate that the market in the ASEAN developing countries has been impacted by US monetary policy In which case, stock prices and portfolio flows respond in opposition to IR us10 but the policy interest rate and exchange rate move in the same direction In addition to being statistically significant, the aforementioned correlations support the research concept Contrarily, despite being statistically significant and responding in the same direction as IR us10, the factors of export growth, production, inflation, and credit growth not match the expected sign as compared to the hypothesis Regarding the analysis's findings regarding the effects of the US monetary policy on Vietnam, they demonstrate that long-term US yield shocks have an opposite effect on output, inflation, stock prices, credit growth, and export growth; Policy interest rates and exchange rates have an identical effect The above relationships are statistically significant and are in line with the research premise Portfolio flows, in contrast, did not match the expected sign compared to the hypothesis, although being statistically significant in conjunction with the IR us10 shock 5.2 SOME POLICY IMPLICATIONS 5.2.1 For ASEAN countries 5.2.1.1 Management of interest rate policies To assist generate space for monetary policy, developing nations in ASEAN that manage interest rates should work to construct a "cushion" of rates at a safe level relative to the US Policy interest rates should pursue stable and long-term goals; Given the limited room for monetary policy, ASEAN countries must take additional steps to ease pressure on interest rate management, including easing selective macroprudential policy measures, applying unconventional monetary policies, and sharing 26 the burden of interest payments with the government; Central banks should specify their objectives and pursue a combination of policies by selecting a combination of tools; This promotes financial stability, increases resilience to external shocks, and preserves some space for monetary policy 5.2.1.2 Management of exchange rate policies Because an intermediary exchange rate mechanism doesn't require strenuous capital flow management measures or give speculators a clear front from which to strike, it may be advantageous to pursue it This reduces the erosion of independent financial policy and contributes to the stabilization of the exchange rate; Increase the nation's foreign exchange reserves, which improves exchange rate protection by making it easier to intervene in the foreign exchange market and increases the hedging function Countries should replace the peg to the local currency in USD with an exchange rate system that is priced against a basket of currencies, which will help to keep the exchange rate somewhat stable 5.2.1.3 Management of stock market Countries should concentrate on cultivating and improving the caliber of investors, particularly by highlighting the importance of domestic institutional investors; assisting in boosting market efficiency as well as the market's capacity to self-correct and protect against outside shocks; The development fund sector needs to be supported by government initiatives; enhance the securities market's administration, oversight, transparency, and soundness; implement international best practices for information disclosure; promoting the FTSE ASEAN index's importance The FTSE ASEAN All-Share Index, the FTSE ASEAN Stars Index, and the FTSE ASEAN All Share Ex-Developed Index are all parts of the FTSE ASEAN Index It will make it easier for people to access the 27 ASEAN market, present additional options for investors, and help increase market liquidity in the region 5.2.1.4 Management of exports Diversification of the market is necessary To fully benefit from tax incentives to strengthen the capacity to develop supply channels and the competitiveness of ASEAN countries, ASEAN countries must increase and further extend trade agreements with significant partners items and expanding market segments Additionally, the economy will be restructured to boost labor productivity, vigorously develop ancillary sectors, and fortify connections to raise the competitiveness of exported goods; and, in the long run, will concentrate on the home market to support exports 5.2.1.5 Management of capital flows To help strengthen the stability of this capital flow, ASEAN nations should implement a gradual tax structure based on the length of the investment; Governments in ASEAN nations should take action to strengthen their position in the financial market with more adaptable financial instruments, as well as to improve their ability to oversee, supervise, and implement macroeconomic policies and mitigate risk To strengthen the ability of the economy to hedge its financial exposure, to better position itself to intervene in the market when necessary, and to ensure that it can cope, ASEAN countries should think about accumulating a sizable amount of foreign exchange reserves the possibility of a reversal of capital flows; Commercial banks in these nations might be able to raise interest rates on deposits by implementing further urgent measures, such as easing some restrictions on debt market management for foreign indirect investors For clients who are not residents, foreign currency 28 5.2.2 For Vietnam 5.2.2.1 Growth stability Market diversification helps to avoid being too dependent on one or several other partner countries, increasing flexibility in policies to deal with potential risks; Investment diversification is a comprehensive solution to support growth and minimize risks due to external influences Market diversification will help to attract investment and vice versa, investment diversification is a premise to help diversify markets; It is necessary to change the structure of the industry, especially the industries producing ancillary products by the domestic economy in order to spread more to Vietnam's production and added value, helping to improve the sustainable trade structure in depth; The increase in foreign exchange reserves strongly supports the management of macro-financial policies and promotes growth, helping to limit negative policy shocks from outside 5.2.2.2 Management of interest rate It is necessary to adjust the policy rate so that it is a more reasonable directional tool for the interest rate level, in line with the general situation of world interest rates, creating an advantage and giving more space for monetary policy to deal with the problems Managing policy interest rates in association with inflation targeting and long-term stability helps Vietnam be more proactive in managing interest rates without being overly dependent on the US disruptions to the economy and financial system abroad; synchronize with exchange rate policy to benefit from this policy's "support" role and ease strain on interest rate management; In order to put the country in a strong financial position to interfere in the market, coordinate monetary policy, and support it when there are negative shocks from the outside, budget restructuring tries to increase fiscal room and forecast 29 5.2.2.3 Management of exchange rate Increase the exchange rate's adaptability while staying within the bounds of stability, and stop the trend of abrupt upward adjustment providing circumstances for the growth of foreign exchange reserves to support the management of the exchange rate policy, moving away from the exchange rate policy based on export support, and moving toward sustainable trade reform; Increase the speed of the established banking system's reform so that it can actively participate in both the domestic and global foreign exchange markets will improve the financial system's ability to respond to and manage risks brought on by changes in external macroeconomic policy and will favorably impact the exchange rate decreasing pressure on exchange rate management by making a significant contribution to closing the gap between the official and unofficial exchange rates; The "cushion" for currency rate stability is strengthened by quickening the growth of foreign exchange reserves the development of diversified financial assets and instruments to assist decrease risks through hedging strategies, as well as creating a stable financial system, can help combat shocks; When the USD appreciates excessively due to the United States' strict monetary policy, encouraging the diversification of foreign currency transactions in international trade exchanges, such as EUR, JPY, and CNY, also helps to lessen the strain on exchange rate management; Utilizing more of the advantages offered by the mooring mechanism under a basket of currencies that Vietnam is putting into place helps to keep the exchange rate somewhat stable, while also guaranteeing the policy's flexibility to help prevent being severely affected by shocks from the international financial markets, as well as better preparing VN for shocks from the international commodity markets 5.2.2.4 Management of stock market The promotion of the market leader role and minimizing market fluctuations will be aided by raising the caliber of stock market 30 participants in the direction of creating professional investment organizations; this will also help to increase efficiency as well as the capacity to self-correct and defend against outside shocks; Raising listing standards will raise the quality of securities products, and there needs to be a clear roadmap with guidelines for capital increases following the listing stages Enhancing the quality standards of corporate governance and risk management at issuers in order to improve efficiency in business activities and create attraction for the intrinsic value of the business Applying accounting and auditing standards according to international practices, contributing to the transparency of financial information of listed companies; Diversify products, encourage companies to list bonds, build new indexes as base assets to diversify derivative securities products, helping to have enough products to satisfy all tastes risks as well as risk management needs of investors; Improve the quality of management, supervision, transparency and soundness of the securities market, apply standards of information disclosure in accordance with international practices; perfecting the legal basis system; Speeding up the market upgrade process has greatly improved the Vietnamese stock market in terms of both size and quality Along with that, it is necessary to focus on investing in infrastructure and technology, simplifying administrative procedures will attract and attract many domestic and international investors to help Vietnam's stock market be upgraded and sustainable development 5.2.2.5 Management of exports It is necessary to diversify the markets To widen supply channels and diversify markets, Vietnam must make the most of the new markets created by free trade agreements Restructuring value chains economically to boost labor productivity, expand auxiliary industries vigorously, and fortify ties to improve the competitiveness of exported commodities; long-term domestic market focus to support exports 31 5.2.2.6 Management of Credit policy To lessen pressure on the foreign exchange market and lower risks for businesses, it is necessary to swiftly accelerate the policy of switching the entire relationship between borrowing and depositing foreign currencies to buying and selling foreign currencies This will involve gradually lowering the ratio of foreign currency credit to total credit Controlling enterprise lending sources as well as credit institutions in the global capital market strictly and selectively when the USD appreciates Due to out-of-control foreign borrowing, it will affect not only enterprises themselves but also the national credit rating, which will push up borrowing interest rates; Diversifying the loan structure in different foreign currencies also helps to reduce the burden on foreign currency borrowers when the US implements monetary policy to make the USD appreciate; Balancing the economy's ability to absorb capital to direct credit flows to priority sectors of the economy; The national banks should aim to manage credit institutions according to international standards, step by step removing administrative tools such as credit lines to improve operational efficiency as well as reduce operational risks of these organizations themselves