La dokhachuong sum

INTRODUCTION Rationale Monetary policy transmission is a process through which monetary policy makes changes in economy by different transmission channels and finally obtain the target of inflation and economic growth The State bank of Vietnam annually sets credit growth rate for the entire banking system to control inflation, macroeconomic stability and economic growth enhancement However, there are periods that economic growth is preferred to inflation control due to the fact that inflation is retained and long-lasted at low rates That is the reason for the State bank to enlarge credit continuously for years and resulted in the increasing inflation Hence, is it true that the State bank considers banking credit channel one of the important monetary policy transmission mechanism to control inflation and to promote economic growth? To investigate the role of banking credit channel in monetary policy transmission mechanism, Bernanke and Blinder (1988) built a theoretical model of credit supply and demand relationship to analyze the banking credit transmission through the systems of credit institutions, thus, to influence the economy De Mello and Pisu (2010), Sun et al (2010), Cyrille (2014) also built banking credit channel models by using VECM model (Vector-Error Correction Model) based on the theory of Bernanke and Blinder (1988) The estimation results showed the existence of banking credit channel in Brasil, the results also discovered the existence of the channel in China and countries of UDEAC On the basis of the research overall goals, the author select the topic: “Analyzing banking credit channel in monetary policy transmission mechanism in Vietnam: An approach using VECM model” The research objective is to suggest moderation of effective monetary instruments through banking credit channel in monetary policy transmission mechanism in Vietnam From this point of view, the author uses the VECM to question the existence of banking credit channel in Vietnam? How is the relationship between credit and inflation reflected in credit supply and demand equation? From the research overall goals, objectives and questions, the research identifies the research scope, limit and methodology The research results have certain scientific contribution by introducing theory of banking credit channel; estimation results show that monetary policy transmission mechanism in Vietnam does go through banking credit channel In addition, the research also provides recommendations in moderating monetary policy targeted at controlling inflation and/or promoting economic growth To achieve the above-mentioned results, the author composes the research into 04 chapters with specific major contents: overview of theory and practice of monetary policy transmission mechanism through banking credit channel; conducting monetary policy in Vietnam through banking credit channel; quantitative analysis to determine the existence of banking credit channel in monetary policy transmission mechanism in Vietnam; conclusion and recommendations CHAPTER 1: OVERVIEW OF THEORY AND PRACTICE OF MONETARY POLICY TRANSMISSION MECHANISM THROUGH BANKING CREDIT CHANNEL 1.1 Overview of theory of monetary policy transmission Monetary policy transmission is understood as a process by which the decisions on monetary policy moderation make changes in GDP and inflation (Taylor, 1995) State bank uses other monetary instruments to impact the economy Miskin(1995) summarized the monetary policy transmission through different channels including: credit, interest, exchange rate and asset price 1.1.1 Interest channel Interest channel mainly impacts the market interests such as consumption loans, purchasing loans or deposits at financial institutions A decrease in the market interest leads to the reduce of borrowing costs and deposit interest, thus, helps stimulate enterprises and consumers to make larger investment and consumption loans As a result, the gross demand for goods and services is increased 1.1.2 Exchange rate channel 1.1.3 Asset price channel Increased interest due to a tight monetary policy may create a huge investment in bonds rather than in stocks, therefore, reduce the stock prices and make change in the net value of assets A decrease in stocks may also worsen the debts/equity ratio and lower the debt settlement probability of the enterprises In that case, enterprises should cut down their investment spendings or suspend business operation expansion, and as a result, the production is severely affected 1.1.4 Banking credit channel Credit channel in monetary policy transmission mechanism exists due to the asymmetric information on the monetary market and operates through the impacts on banking credits and assets balance of the enterprises and households Bernanke and Blinder (1988) suggested a simplified model to build banking credit channel The private sector allocates and selects between currency or bonds; liabilities of this sector are banking credits The banks take part in assets allocation through the monetary creation activities from deposits, purchasing bonds or crediting private sector Interest channel reflects that an increase in domestic currency may be resulted in an increase in domestic goods in comparison with external goods, thus, in a decrease in demand for domestic goods Increased domestic goods prices may helps reduce the foreign goods price comparatively and, as a result, weaken the trade balance A change in exchange rate not only affects the total demand, it also affects the total supply The domestic currency rises may reduce the production costs for the enterprises who have imported inputs Hence, in contrast with total demand, the production volumes of these enterprises are consequently increased Where,  bond interest,
loan interest of the banks,  operation scale of the economy, required reserve ratio Balance in credit market shown as following:  
=  , , ++− Balance in commodity market is demonstrated:     = ,   , ,  ++− − 1.2 Overview of practical research on banking credit channel 1.2.1 International studies Theoretical model of banking credit channel was introduced by Bernanke and Blinder (1988) which was the elementary theory for variety of empirical researches on the existence of banking credit channel of the countries De Mello and Pisu (2010), Sun et al (2010), Cyrille (2014) used VECM model to illustrate the theory of Bernanke and Blinder (1988) and to examine the credit channel in monetary policy transmission mechanism in Brasil, China and other countries of UDEAC The research results proved the existence of banking credit channel in those countries Interest rate and required reserve ratio have a reversed relationship with credit 1.2.2 Studies in Vietnam Studies about monetary transmission mechanism in Vietnam have been analyzed and evaluated by the local economists, especially in recent years when the scientists used the Vector Autoregression Model (VAR) and Vector Error-Correction Model (VECM) to determine the existence of the transmission mechanisms and CPE was close and direct Chu Khanh Lan (2013) used VAR with quarterly figures to examine the monetary policy transmission mechanism in Vietnam for the period of 2000-2011 The estimation results showed the response of CPI before the changes of currency supply was magnified with much higher speed with credit channel in comparison with without credit channel Moreover, the author used the real interest, thus, it did not reflect the nature of the impacts of macroeconomic policy on inflation Pham The Anh (2009) examined the determinants of inflation in Vietnam for the period from the first quarter 1995 to the fourth quarter 2008 using the theoretical model IS-LM The regression results discovered that the change in currency supply had strong impact on inflation since the third quarter after policy adjustment was conducted Tran Thi Xuan Huong et al (2014) used VAR model to investigate the monetary policy transmission mechanism through banking credit channel in Vietnam before and after financial crisis (1/200012/2007) and (1/2008-7/2013) correspondingly The research findings showed that before the crisis the interest channel existed and operated according to the theory in Vietnam for both loans and deposits interest rates Inflation would decrease when the moderation interest rate increased, monetary policy transmitted rapidly through interest channel and ended in approximately months later In contrast, during the crisis, the interest channel did not have any effect When there was a shock in moderation interest rate, deposit rate increased fast and so did the lending rate, however, inflation did not reduce but increase Nguyen Thi Thu Hang and Nguyen Duc Thanh (2011) used the ECM model to determine the factors affecting inflation The research results show that the inflation persistence in Vietnam is high and is a determinant of Vietnam’s present inflation, however, the relationship between banking credit and CPI does not have statistic significance; in contrast, the relationship between banking credit and PPI does Cao Thi Y Nhi and Le Thu Giang (2015) used the SVAR to investigate the monetary transmission mechanism in Vietnam and pointed out that the relationship between total credit Hence, researches about monetary transmission mechanism through banking credit mechanism based on the theory of Bernanke and Blinder (1988) have not been conducted in Vietnam Furthermore, the domestic studies in Vietnam mostly focused on the traditional models of macroeconomic analysis such as VAR and SVAR However, financial data series usually have elementary solution at the root value, thus, using VAR or SVAR encounters difficulties in evaluating the continuance of data series Therefore, this research focuses on examining monetary transmission mechanism through banking credit channel based on the theory of Bernanke and Blinder (1988) to produce a different view from previous studies in locating the role of credit agencies in conducting monetary policy to impact the economy and to control inflation or to support economic growth and Blinder (1988) and other related empirical models of De Mello and Pisu (2010) for the case of Brazil, Sun et al (2010) for the case of China to support a different view to locate the role of credit agencies in implementing monetary policy to impact the economy and to control inflation as well as to promote economic growth 1.3 Conclusion International empirical studies affirmed the role of banking credit channel in monetary transmission mechanism in the countries Based on the theory of Bernanke and Blinder (1988), De Mello and Pisu (2010), Sun et al (2010) concluded that there was credit channel in Brasil, China and UDEAC This is the selected model to investigate the banking credit channel in Vietnam as it is an approach that has never been studied in Vietnam before Studies about monetary transmission mechanism in Vietnam focused mostly on the channels of interest, exchange rate and financial asset value Meanwhile, banking credit is the important capital channel of the economy and, simultaneously the monetary policy usually impacts directly or indirectly on the economy through banking credit Thus, in spite of previous studies mentioning credit in investigating the relationship with inflation, however, they considered it as a macroeconomic variable in the estimation model but not reflecting the nature of banking credit Furthermore, studies in Vietnam mostly used traditional models such as VAR and SVAR in analyzing macroeconomics Therefore, this research specifically studies the monetary transmission mechanism through banking credit channel introduced by Bernanke CHAPTER 2: IMPLEMENTATION OF MONETARY POLICY IN VIETNAM THROUGH BANKING CREDIT CHANNEL Diagram 2.2: Process of targeted and practical economic growth 50% 10% 2.1 Moderation target 0% The Law of State bank in 1997 stipulated a multi-targeted implementation of monetary policy including currency value stability, inflation control, economic growth promotion, national defense and public security and improving social quality However, the moderation target of monetary policy was changed in the Law of State bank 2010 which solely stipulated the target of monetary policy to stabilize the value of currency reflected in inflation index 2.1.1 Inflation target Diagram 2.1 illustrated the process of annually targeted inflation for the State bank to use monetary instruments to control inflation The graph shows the shapes of the real inflation and the targeted inflation are definitely different for the period in research For the period of 2001-2007, the distance between them was not really large, however, this gap was enlarged for the period of 20082011 and then narrowed for the period of 2012-2014 due to a shock of rapid inflation of the 2010-2011 Diagram 2.1: Process of targeted and practical inflation 40% 20% 0% -20% Lạm phát mục tiêu Lạm phát thực tế 0% -50% Mục tiêu Thực Tỉ lệ lạm phát (RHS) 2.1.2 Economic growth target Economic growth of Vietnam for the period of 2000-2014 experiences different levels The growth speed increases in both figure value and speed for the period of 2000-2007 and decreases in 2008, it continues going down to 5.3% in 2009 before bounces back in 2010 to remain a lower rate for the peiod of 2011-2014 (Diagram 2.2) It is obvious that the pressure of inflation and its negative impacts on the economy forces the State to set priority policy to control inflation in 2011 That is the reason why Diagram 2.2 illustrates the continuous changes in annual inflation and growth 2.2 Intermediate target 2.2.1 Credit growth target Credit growth is an intermediate target that the State bank uses to support economic growth and to impact other monetary policies The process of targeted and practical credit growth is shown in the Diagram 2.3 For the period of 2000-2003, the difference between targeted and practical credit growth was low However, this gap was enlarged for the period of 2004-2007 and then narrowed in 2008 before enlarging again in two following 10 years of 2009-2010 The gap between targeted and practical credit growth continued to narrow in 2011-2012 due to a shock of high inflation in 2010-2011, hence, credit growth was lower than expected for 2011-2012 The potential inflation was forecast to be dangerous so that inflation control was of preference Diagram 2.3: Process of annual targeted and practical credit growth 60% 30% 20% 40% 10% 20% 0% Tín dụng mục tiêu Lạm phát 0% 2.3 Instruments to implement monetary policy -10% 2.3.1 Required reserve ratio instrument Tín dụng thực tế Diagram 2.4: Process of targeted and practical total payment 30% 20% 10% 0% -10% 50% 40% 30% 20% 10% 0% TPTTT mục tiêu Lạm phát targeted, it was enlarged for 2004-2007 However, since late 2007 and 2008, inflation occurred and increased to force the State bank to tighten monetary policy, as a result, the growth of total payment in 2008 was forced down Global crisis slowed down economic growth for the late 2008 and early 2009 forcing an expansion of monetary supply This is the reason for the high and beyond targeted total payment that needs to be controlled for the period of 2009-2010 Nonetheless, volatility of inflation continued and forced the State bank to take deliberate action that resulted in the narrowed gap between targeted and practical total payment for the period of 2011-2014 TPTTT thực In the context of increasing CPI in the earlier months of 2004, the State bank adjusted the required reserve ratio since 7/2004 In details, fixed deposits under 12 months increased from 2% to 5% for VND and from 4% to 8% for foreign currencies To stabilize inflation, State bank continued to hold such required reserve ratio until 5/2007 High and continuous growth of credit put high pressure on inflation, thus, State bank was forced to increase required reserve ratio for fixed deposits under 12 months to 10% in 5/2007 When inflation reached more than 20% in 2008, the State bank continued to increase this ratio to 11% since 2/2008 applied to fixed deposits of both VND and foreign currencies, and then cut down under the pressure of economic growth 2.2.2 Total payment target 2.3.2 Credit limit The process of targeted and practical total payment is shown in the Diagram 2.4 For the period of 2001-2003, it shows a tightened monetary policy for the lower practical total payment than After more than 13 years of removal, in 2011, the credit limit was again used by the State bank in its monetary policy Specifically, the Instruction 01/CT-NHNN dated 1/3/2011 on 11 12 implementing monetary policy and banking operation, the State bank governor required commercial banks to build their credit growth plans by 2011 to control inflation and stabilize macroeconomics 2.3.3 Interest Refunding rate and discount rate Refunding rate and discount rate are instruments to impact deposits/credits For the period of 2000-2008, the State bank retained extended credit to support economic growth through prolonged retention of low refunding and discount rates However, the pressure of inflation in 2009 underlying potential instability and loss of credit, the State bank rose the refunding and discount rates at doubled value in comparison with 2008 to reduce banking credit and through which to control inflation After the success of inflation control in 2010, the State bank again cut down refunding and discount rates However, the prolonged and heated credit growth had a lagging impact on inflation and inflation, again, was high in 2010-2011 forcing the State bank to rise refunding and discount rates again Deposits interest ceiling Macroeconomics experiences difficulties, high inflation, complicated fluctuations of gold and foreign currency markets, high decrease in stock and real estate markets forces the State bank to take strong measures to control inflation and stabilize macroeconomy To ensure the regulations of the monetary market, the State bank requires credit agencies to fix their deposit interests including promotion expenditure in any form not higher than the periodic ceiling rate 13 2.3.4 Exchange rate Moderation of exchange rate of the State bank for the period of 2001-2014 encounters changes causing fewer shocks In details, for the period of 1997-1998, exchange rate policy was conducted under the pressure of the ASEAN financial crisis forcing the State bank to adjust marginal exchange rate to +/-5% in February 1997 and +/-10% in October 1997 Additionally, the State bank adjusted the exchange rate from 11.175VND/USD to 11.800VND/USD in February 1998 to relieve the pressure of VND and to adjust the standard exchange rate 2.3.2 Open market Open market operated since 12th July 2000, whereby, the State bank conducts tightened or extended monetary policies to control the market interests and manage the market liquidity The interest signals and allowed transaction volume announced by the State bank were the thermometers of the market liquidity 2.4 Conclusion Qualitative analysis shows that the State bank considers credit as a key element of inflation To control inflation successfully, the State bank limits the banking credit growth especially for the non-production sectors with heated growth such as lending in real estate or stock business Therefore, on the qualitative aspect, credit is an important channel in transmitting inflation In quantitative section of the later chapter, the author will examine the qualitative analysis of the relationship between credit growth and inflation 14 CHAPTER 3: DETERMINING THE EXISTENCE OF BANKING CREDIT CHANNEL IN MONETARY POLICY TRANSMISSION MECHANISM IN VIETNAM 3.1 Introduction Developing the theory of Bernanke and Blinder (1988), De Mello and Pisu (2010) examined the banking credit channel in Brazil based on the theoretical model defined as:  =  +   +   +   +    =  +   +   +   +  +  Where  is credit supply,  is credit demand,  inflation ratio,  is yield,  is lending rate,  is capital, and  is deposit interest 3.2 Methodology To apply VECM model, the prerequisites include: data series in the research model must ensure that there is no stationarity in the original data and stationarity at the first order difference; sample data must be large enough to ensure estimation for the whole equation system; data series must have a co-integrated relationship The next procedure to be performed is to test whether the variables exist statistically significant in long-term nonlinearity, thereby eliminating the unrelated variable in the long-term space between the variables in the model The next step will be the test that remove the short-term impact variables from the error correction equation 15 3.4 Data analysis and testing model application condition 3.4.1 Data analysis Data used in this research is extracted from the online database of IMF-IFS Research period from 1/2001 to 12/2014 The main reason of period selection is due to the unavailability of monthly database on banking credit for the previous time of 12/2000 3.4.2 Testing basic resolution Using Eviews software, the basic testing results of the original value indicates that no data serie satisfies the stationarity Examining the stationarity after the first order differencehas failed to reject the null hypothesis of the ADF test - no basic resolution (stationarity) 3.4.3 Testing the selection of optimal latency and co-intergrated equation Using Eviews software to find the optimal latency from to 13 indicates that all LR, FPE, AIC, SC, and HQC criteria have the quartic optimal latency from to The FPE, SC, and HQC criteria give the optimal latency from to 13 From here, the optimal latency is selected to evaluate the model at the fourth latency According to Maximum Eigenvalue testing method, for the hypothesis  at most two co-linking equations were rejected at 5% as Max-Eigen Statistic (12.78) was lower than the critical value (27.58 ) Thus, in this testing, the VECM model has two cointegrated equations 16 3.4.4 Determining application conditions for banking credit channel According to De Mello and Pisu (2010), the identification of supply and demand functions in credit channel model must be based on the mark of lending interest obtained from the two cointegrated equations Table 3.6 shows that the first equation (! ) has positive estimation value to lending rate and the second equation (! ) has negative value Thus, the first equation is identified as the credit demand equation and the second the supply equation This results is also similar to the estimation coefficient generated from co-integrated equations of De Mello and Pisu (2010) and Sun et al (2010) This indicates that there are necessary conditions to test the credit supply and demand functions in Vietnam Table 3.6: Estimation coefficients from co-integrated vectors in Johansen test ! ! CREDIT RR RC RL IPI CPI -7.81 5.62 -85.18 136.72 2.23 20.02 21.81 64.21 -6.07 -25.41 -26.05 -30.71 Long-run exclusion test With each of the above-mentioned hypothesis, using Eviews software to provide long-run exclusion tests shown in the Table 3.7 below (value in the brackets reflects the # − $#%#$#&$) Table 3.7: Long-run exclusion test results Long-run exclusion CRED IT RR RC 27,95*** 21,50*** 17 15,90*** RL IPI CPI 31,64*** 24,91*** 28,74*** test [0.00] [0.00] [0.00] [0.00] [0.00] [0.00] Annotation: *, **, *** indicate statistic value at the corresponding levels 10%, 5% and 1% Hence, the long-run exclusion test shows that there is no variable of the VECM model is removed in the long-run relationship at the significance 5% This means the variables are used to estimate the long-run relationship them and are suitable with banking credit channel and the selected variables in the studies of De Mello and Pisu (2010), Sun et al (2010) and Syrille (2014) Weak exogeneity test In Table 3.8, it is clear that the  hypothesis cannot be rejected with the variables of lending rate, required reserve ratio, industrial production index and CPI at statistic value of 1% Credit does have short-term impacts with statistic value of 5% Reversely,  of the refunding rate is lower than the statistic value '()*)+()+,  critical value ',-+)+,* (2) = 4,605 with statistic value of 10% Therefore, refunding rate does not impact credit supply and demand in the short-term Thus, in error-correction model, refunding rate is null when considering the adjustment process to balance in the long-run after the impact of each shock The weak exogeneity test cannot rejet the influence range of CPI on the credit supply and demand From this point, credit provides orientation information for the future inflation Table 3.8: Weak exogeneity test results CREDI T Weak exogeneity test 9,13 ** [0,01] RR 12,48 *** [0,00] RC 0,66 [0,71] RL IPI CPI 35,69*** 10,79*** 6,00** [0,00] [0,00] [0,04] Annotation: *, **, *** indicate statistic value at the corresponding 18 levels 10%, 5% and 1% 3.5 Testing the existence of banking credit channel in Vietnam 3.5.1 Estimation results of the long run co-integrated relationship The long-run exclusion test and weak exogeneity test need to be assessed in the VECM:  : !66 = !787 = 96: = 96: = Conducting the test by using Eviews software shows that  (2) = with two co-integrated equations and statistic value '()*)+()+,  0,6624 is lower than the critic value '()*)+()+, (2) = 4,605 at the statistic value of 10% Thus, the test results does not show sufficient evidence to reject hypothesis  on the combination of the long-run exclusion test and short-term weak exogeneity test On the basis of general test results between the long-run exclusion test and the short-term weak exogeneity test, the credit supply and demand equation is identified as follow (the values in square brackets reflect the statistic value # − $#%#$#&$): 9,120RC 14,607 RL 2,362 CPI 0,445 IPI + + + > ? @ = 0,401 − [5,78] [13,15] [9,16] [37,42] < =