(Luận văn) the effect of money growth on inflation in vietnam from 2004 to 2010

t to ng INSTITUTE OF SOCIAL STUDIES HO CHI MINH CITY THE HAGUE hi UNIVERSITY OF ECONOMICS ep THE NETHERLANDS VIETNAM w n VIETNAM- NETHERLANDS lo ad PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS ju y th yi pl al n ua THE EFFECTS OF va n MONEY GROWTH ON INFLATION IN fu ll VIETNAM FROM 2004 TO 2010 oi m nh at A thesis submitted in partial fulfilment of the requirements for the degree of z z MASTER OF ARTS IN DEVELOPMENT ECONOMICS k om l.c gm BUI DINH PHUONG THAO jm ht vb By NGUYEN VAN NGAI an Lu Academic Supervisor: n va re t to ng CONTENTS hi ep CHAPTER 1: INTRODUCTION ! w 1.1 PROBLEM STATEMENT n lo 1.2 RESEARCH OBJECTIVES AND QUESTIONS ad 1.3 METHODOLOGY y th ju 1.4 STRUCTURE OF THESIS yi pl ua al CHAPTER 2: LITERATURE REVIEW 2.1 THEORETICAL LITERATURE n n va 2.1.1 INFLATION ll fu 2.1.2 SOURCES OF INFLATION oi m Keynesian View nh Demand-pull inflation 11 at Cost-push or structuralist inflation 13 z z Monetarists View 15 vb 2.1.3 MONEY GROWTH 17 ht k jm 2.2 EMPIRICAL LITERATURE 21 gm 2.3 AN OVERVIEW OF VIETNAM INFLATION AND MONEY GROWTH FROM l.c 2000 TO 2010 29 om 2.3.1 INFLATION 29 an Lu 2.3.2 MONEY GROWTH 31 2.4 CHAPTER REMARK 32 n va AND DATA SOURCES 34 3.1 ANALYTICAL FRAMEWORK 34 re CHAPTER 3: RESEARCH METHODOLOGY, MODEL SPECIFICATION t to ng 3.2 MODEL SPECIFICATION 35 hi 3.3 DATA SOURCES 42 ep 3.4 ECONOMETRICS TECHNIQUES 42 w 3.4.1 STATIONARITY AND UNIT-ROOT TEST .42 n lo 3.4.2 COINTEGRATION 44 ad 3.4.3 ERROR CORRECTION MODEL (ECM) 47 y th 3.4.4 SHORT-RUN CAUSALITY TESTS 49 ju yi Granger causality tests 49 pl Variance decomposition 51 al n ua Impulse response function 51 n va ll fu CHAPTER 4: THE EFFECTS OF MONEY GROWTH ON INFLATION IN oi m VIETNAM FROM 2004 TO 2010 52 4.1 DESCRIPTIVE STATISTIC 51 nh at 4.2 ECONOMETRIC RESULTS , 54 z 4.2.1 UNIT ROOT TESTS , 54 z ht vb 4.2.2 BIVARIATE TESTS , 55 jm Engle-Granger cointegration tests 55 k Error correction model 56 gm l.c 4.2.3 MULTIVARIATE TESTS 51 Johansen cointegration tests , 57 om Vector error correction model (VECM), Granger causality tests, variance an Lu decomposition and impulse response function 59 n va 4.3 MODEL FORECASTS 66 4.5 CHAPTER REMARK 70 re 4.4 RESULTS COMPARISON 66 t to ng CHAPTER 5: CONCLUSIONS AND POLICY IMPLICATION 73 hi 5.1 CONCLUSIONS 73 ep 5.2 POLICY IMPLICATION 74 w 5.3 LIMITATION 76 n lo ad REFERENCES ju y th yi APPENDIX pl n ua al n va ll fu oi m at nh z z k jm ht vb om l.c gm an Lu n va re t to ng LIST OF TABLES hi ep Table 3.1: Variables Description, Expected Signs and Data Sources 36 w Table 4.1: Description of Variables 52 n lo Table 4.2: Correlation among Variables 54 ad Table 4.3: Unit Root Tests Results 54 y th ju Table 4.4: Unit Root Tests for Residual ofCPI and M2 55 yi Table 4.5: Error Correction Model 56 pl ua al Table 4.6: Johansen's Cointegration Tests With Lags 58 Table 4.7: Granger Causality Tests: P-Values For The lTests 60 n n va Table 4.8: Variance Decomposition ofCPI (Order Reflects Cholesky Ordering) 62 ll fu Table 4.9: The Thesis' Results in Comparison with Empirical Studies' Results 67 oi m nh • at LIST OF FIGURES z z vb jm ht Figure 2.1: The Long-Run Macroeconomic Equilibrium Figure 2.2: Recessionary and Inflationary Gap 10 k gm Figure 2.3: Government Intervention When Recessionary Gap Occurs 10 l.c Figure 2.4: An Increase In Aggregate Demand 12 om Figure 2.5: Demand-pull Inflation Spiral 13 an Lu Figure 2.6: An Increase in Short-run Aggregate Supply 14 Figure 2.7: A Cost-push Inflation Spiral 14 va n Figure 2.8: CPI in December and Average CPI from 2001 to 2010 31 Figure 3.1: Analytical Framework 34 Figure 4.1: Impulse Response Functions 65 re Figure 2.9: Broad Money Growth From 2002 To 2010 32 t to CHAPTER 1: INTRODUCTION ng hi ep This chapter will explain the importance of this thesis, its objectives and research questions In addition, a brief of methodology is also mentioned in this part Finally, the w n structure of thesis will be presented lo ad y th l.lPROBLEM STATEMENT ju Money plays important role to the economy Greco (200 1) suggested money has five yi pl functions which are "a medium of exchange, a standard of value, a unit of account, a ua al store of value and a standard of deferred payment" As a medium of exchange, money n helps to divide the goods exchange process into two separate parts which are purchase va n process and sales process Therefore, people can buy goods at different places and sell fu ll goods in different time; hence money promotes trading activities Furthermore, money is m oi used as standard to measure and present value of goods as well as prices of goods It at nh extremely supports business to quote and record costs, products' prices and calculates z value of gross domestic products (GDP), gross national products In addition, money is z vb preferred to keep for future consumption and prevent risks As a standard of deferred k jm ht payment, money makes payment become easier, more flexible and time-saving It increases the liquidity of debts, thus supports businesses and economic growth gm om l.c Based on its importance to the economy, money growth can affect the economy in many channels People receiving more money are willing to consume more, thus it stimulates investment in order to expand companies' business Besides, growth in money supply positively affect the economy On the other hand, high growth in money may reduce its re Consequently, an increase in money stock may lead to growth in aggregate demand and n • va will sponsor government's expenditure and decrease governmental budget deficit n a Lu consumption and encourages imports More money means more capital to make t to value and cause an increase in price level Monetarists suggested that money is the main ng determinant of inflation while Keynesian views argued money which leads aggregate hi demand to exceed aggregate supply is only one of determinants of inflation However, ep • Mishkin (1995) concluded that both monetarists and Keynesians believed that high w n inflation only possibly occurs with high money growth rate lo ad y th There are also a majority of empirical studies examining the effects of money growth on ju inflation Several studies suggested that money supply significantly positively influences yi pl inflation such as Moroney (2002), De Grauwe and Poland (2005), Thornton (2008), ua al Kaufmann and Kugler (2008), Gingting and Bird (2009) and Basco, et al (2009) In n contrast, some papers, for example Fie (2003), argued that the effects of money growth va n on inflation is insignificant In case of Vietnam, there are different findings regarding the fu ll dependence of inflation on money supply According to Baker, et al (2006), Goujon m oi (2006) and Thanh (2008), money positively impacts price level On the other hand, a at nh research of Hung and D Pfau (2008) pointed out this effect is unobvious z z In addition, according to the Vietnam's Prime Minister Nguyen Tan Dung (2011), the vb jm ht primary goals of the government at present are to stabilize macroeconomic and to control inflation at an appropriate level If money growth does affect inflation in Vietnam, k gm monetary policy becomes a powerful policy for the government to maintain inflation at l.c its target level However, there is few studies examined and quantified the effects of om money growth on inflation in Vietnam in order to define the level of increases in money influence of money growth on inflation but also estimate the level of money growth to n va achieve the expected inflation of the Vietnamese government in 2011 n a Lu supply to meet the target inflation Therefore, this thesis aims to not only examine the re t to 1.2 RESEARCH OBJECTIVES AND QUESTIONS ng Analyzing the impact of money supply on inflation is extremely important for the hi government to conduct an appropriate monetary policy Therefore, this thesis aims to ep • examine the effects of money growth on price level in long-run and short-run in Vietnam w n In order to meet this overall goal, the research will obtain following objectives: lo ad Analyze the effects of money growth on inflation in Vietnam in long-run y th (i) ju (ii) Analyze the effects of money growth on inflation in Vietnam in short-run yi pl (iii) Advise the level of money growth to meet the target inflation of the Vietnamese n ua al government in 20 11 n va The research questions are proposed: ll fu m Does money affect inflation in Vietnam in long-run? oi (i) at nh (ii) Does money affect inflation in Vietnam in short-run? (iii) Which level of money growth does meet the target inflation m 2011 of z z Vietnam's government? jm ht vb 1.3METHODOLOGY k gm In order to examine the dependence of inflation on money growth in Vietnam in long-run l.c and short-run, monthly data from December 2003 to June 2010 are collected from om International Monetary Fund and Vietnam General Statistics Office The research will n a Lu employ descriptive statistics and econometric techniques re correlation matrix will suggest the potential relationship between each pair of variables n data collection such as their distribution, central tendency and variation Then the va Descriptive analysis will firstly give a summary of all variables to provide an overview of t to In addition, the unit root tests are used to test for stationary of all variables to ensure the ng validation oft-tests and F-tests After that, four econometric techniques will be applied in hi ep this thesis in order to examine the long-run and short-run effects of money growth on inflation w n lo ad Firstly, to investigate the long-run influence of money growth on inflation to answer the y th first research question, the Enge-Granger cointegration test and error correction ju mechanism (ECM) are employed yi pl ua al Secondly, the thesis will add other determinants of inflation into a model with money n growth then apply the Johansen co integration tests to re-test the effects of money growth va on inflation in long-run and confirm the number of co integration equations n ll fu oi m After that, in order to answer the second research question, vector error correction model at nh (VECM), Granger causality tests, variance decomposition and impulse response functions are used to examine the short-run impact of money on inflation z z vb k jm ht Finally, a level of money growth is forecasted by applying VECM to meet the target inflation level of the Vietnamese government in 2011 to answer the third research l.c gm question om 1.4 STRUCTURE OF THESIS n a Lu The thesis consists of five chapters re n presents the methodology is applied in the thesis va Chapter presents the important of the thesis' findings and its objectives It also briefly t to Chapter demonstrates the literature review It starts with definitions of money growth ng and inflation Then the chapter focuses on Keynesian views and the quantity theory of hi ep money After that, empirical studies regarding the effects of money growth on inflation are introduced An overview of inflation rate and growth in money supply in Vietnam w from 2000 to 2010 is also presented in this chapter n lo ad y th Chapter is based on theories and empirical research to present an analytical framework ju then develop a model explaining inflation in short-run in Vietnam This chapter will yi mention data sources as well as economic techniques used in the thesis pl ua al n Chapter presents results of hypotheses testing and suggests the level of money growth va to achieve the target inflation ofVietnamese government in 2011 n ll fu oi m Chapter will give the conclusion, policy implications and suggest for further studies at nh z z k jm ht vb om l.c gm an Lu n va re