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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 C.33.44.55.54.78.65.5.43.22.2.4 22.Tai lieu Luan 66.55.77.99 van Luan an.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.C.33.44.55.54.78.655.43.22.2.4.55.22 Do an.Tai lieu Luan van Luan an Do an.Tai lieu Luan van Luan an Do an C.33.44.55.54.78.65.5.43.22.2.4 22.Tai lieu Luan 66.55.77.99 van Luan an.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.C.33.44.55.54.78.655.43.22.2.4.55.22 Do an.Tai lieu Luan van Luan an Do an.Tai lieu Luan van Luan an Do an 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 Stt.010.Mssv.BKD002ac.email.ninhd 77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77t@edu.gmail.com.vn.bkc19134.hmu.edu.vn.Stt.010.Mssv.BKD002ac.email.ninhddtt@edu.gmail.com.vn.bkc19134.hmu.edu.vn Stt.010.Mssv.BKD002ac.email.ninhd 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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 Stt.010.Mssv.BKD002ac.email.ninhd 77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77t@edu.gmail.com.vn.bkc19134.hmu.edu.vn.Stt.010.Mssv.BKD002ac.email.ninhddtt@edu.gmail.com.vn.bkc19134.hmu.edu.vn Stt.010.Mssv.BKD002ac.email.ninhd 77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77t@edu.gmail.com.vn.bkc19134.hmu.edu.vn.Stt.010.Mssv.BKD002ac.email.ninhddtt@edu.gmail.com.vn.bkc19134.hmu.edu.vn 123doc C.33.44.55.54.78.65.5.43.22.2.4 22.Tai lieu Luan 66.55.77.99 van Luan an.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.C.33.44.55.54.78.655.43.22.2.4.55.22 Do an.Tai lieu Luan van Luan an Do an.Tai lieu Luan van Luan an Do an C.33.44.55.54.78.65.5.43.22.2.4 22.Tai lieu Luan 66.55.77.99 van Luan an.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.C.33.44.55.54.78.655.43.22.2.4.55.22 Do an.Tai lieu Luan van Luan an Do an.Tai lieu Luan van Luan an Do an 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 Stt.010.Mssv.BKD002ac.email.ninhd 77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77t@edu.gmail.com.vn.bkc19134.hmu.edu.vn.Stt.010.Mssv.BKD002ac.email.ninhddtt@edu.gmail.com.vn.bkc19134.hmu.edu.vn Stt.010.Mssv.BKD002ac.email.ninhd 77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77t@edu.gmail.com.vn.bkc19134.hmu.edu.vn.Stt.010.Mssv.BKD002ac.email.ninhddtt@edu.gmail.com.vn.bkc19134.hmu.edu.vn 123doc C.33.44.55.54.78.65.5.43.22.2.4 22.Tai lieu Luan 66.55.77.99 van Luan an.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.C.33.44.55.54.78.655.43.22.2.4.55.22 Do an.Tai lieu Luan van Luan an Do an.Tai lieu Luan van Luan an Do an C.33.44.55.54.78.65.5.43.22.2.4 22.Tai lieu Luan 66.55.77.99 van Luan an.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.C.33.44.55.54.78.655.43.22.2.4.55.22 Do an.Tai lieu Luan van Luan an Do an.Tai lieu Luan van Luan an Do an 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 Stt.010.Mssv.BKD002ac.email.ninhd 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an.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.C.33.44.55.54.78.655.43.22.2.4.55.22 Do an.Tai lieu Luan van Luan an Do an.Tai lieu Luan van Luan an Do an C.33.44.55.54.78.65.5.43.22.2.4 22.Tai lieu Luan 66.55.77.99 van Luan an.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.C.33.44.55.54.78.655.43.22.2.4.55.22 Do an.Tai lieu Luan van Luan an Do an.Tai lieu Luan van Luan an Do an 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 Stt.010.Mssv.BKD002ac.email.ninhd 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an.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.C.33.44.55.54.78.655.43.22.2.4.55.22 Do an.Tai lieu Luan van Luan an Do an.Tai lieu Luan van Luan an Do an C.33.44.55.54.78.65.5.43.22.2.4 22.Tai lieu Luan 66.55.77.99 van Luan an.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.C.33.44.55.54.78.655.43.22.2.4.55.22 Do an.Tai lieu Luan van Luan an Do an.Tai lieu Luan van Luan an Do an 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 Stt.010.Mssv.BKD002ac.email.ninhd 77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77t@edu.gmail.com.vn.bkc19134.hmu.edu.vn.Stt.010.Mssv.BKD002ac.email.ninhddtt@edu.gmail.com.vn.bkc19134.hmu.edu.vn Stt.010.Mssv.BKD002ac.email.ninhd 77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77t@edu.gmail.com.vn.bkc19134.hmu.edu.vn.Stt.010.Mssv.BKD002ac.email.ninhddtt@edu.gmail.com.vn.bkc19134.hmu.edu.vn 123doc C.33.44.55.54.78.65.5.43.22.2.4 22.Tai lieu Luan 66.55.77.99 van Luan an.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.C.33.44.55.54.78.655.43.22.2.4.55.22 Do an.Tai lieu Luan van Luan an Do an.Tai lieu Luan van Luan an Do an C.33.44.55.54.78.65.5.43.22.2.4 22.Tai lieu Luan 66.55.77.99 van Luan an.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.C.33.44.55.54.78.655.43.22.2.4.55.22 Do an.Tai lieu Luan van Luan an Do an.Tai lieu Luan van Luan an Do an 37 fact, the inflation rate of Vietnam increased nearly the same as forecasted by Goujon (3.6 percent in 1997 and 9.2 percent in 1998) In recent years, Vietnam’s economic structure has changed but the FCD/M2 is still in the range of 15-20 percent (Graph 4.4) and the trade deficit is still large (Graph 4.1), which implies a high import elasticity relative to income It is clear that the pass-through effect is still high in Vietnam To summarize, the economic structure in Vietnam does not support the adoption of I.T at the moment due to the fact the the economy is highly open and dollarized with high exchange rate pass-through effects These conditions were similar in Brazil at the time that the country adopted I.T 4.2 Health of the financial system Testing the health of the financial market in Vietnam is necessary as a sound financial system creates a strong basis for the absorption of government bonds as well as a good environment for the monetary policy transmission mechanism to work well However, due to difficulties in collecting data, such as bank regulatory capital on riskweighted assets and currency mismatches, this dissertation can only examine the data on stock and bond market capitalization in Vietnam Stock market capitalization in Vietnam is still very low compared to the world average (Graph 4.5) and far below Korea, Chile and Brazil Also, despite a rapid increase in size since 2000 (Graph 4.6), the bond market is thin Most of the domestic bond market consists of government bonds, which are issued by the State Treasury and Vietnam Development Bank The rest are corporate and municipal bonds Liquidity of the bond market is low as the main clients for these market are big state-owned commercial banks, but they seem not to be interested in lending to the government due to low interest rates compared to the huge returns earned on the interbank market There are no professional credit rating institutions So far, the yield curve has not been built up, and thus there is no benchmark for issuing new bonds The slow development of the stock and bond markets limits the ability of the government to raise capital, and thus results in over-reliance on the banking system in fiscal terms Stt.010.Mssv.BKD002ac.email.ninhd 77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77t@edu.gmail.com.vn.bkc19134.hmu.edu.vn.Stt.010.Mssv.BKD002ac.email.ninhddtt@edu.gmail.com.vn.bkc19134.hmu.edu.vn Stt.010.Mssv.BKD002ac.email.ninhd 77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77t@edu.gmail.com.vn.bkc19134.hmu.edu.vn.Stt.010.Mssv.BKD002ac.email.ninhddtt@edu.gmail.com.vn.bkc19134.hmu.edu.vn 123doc C.33.44.55.54.78.65.5.43.22.2.4 22.Tai lieu Luan 66.55.77.99 van Luan an.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.C.33.44.55.54.78.655.43.22.2.4.55.22 Do an.Tai lieu Luan van Luan an Do an.Tai lieu Luan van Luan an Do an C.33.44.55.54.78.65.5.43.22.2.4 22.Tai lieu Luan 66.55.77.99 van Luan an.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.C.33.44.55.54.78.655.43.22.2.4.55.22 Do an.Tai lieu Luan van Luan an Do an.Tai lieu Luan van Luan an Do an 38 Graph 4.5: Stock market capitalization in some countries Stock Market Capitalization (percent of GDP) in some countries 200.00 World 150.00 Brazil 100.00 Chile 50.00 Korea, Rep Vietnam 2003 2004 2005 2006 2007 2008 2009 2010 Source: WB Graph 4.6 : Bond market development in Vietnam Bond Market Development in Vietnam (in percent of GDP) 40 35 30 25 20 Total 15 Corp 10 Govt Jul-11 Nov-10 Jul-09 Mar-10 Nov-08 Jul-07 Mar-08 Nov-06 Jul-05 Mar-06 Nov-04 Jul-03 Mar-04 Nov-02 Jul-01 Mar-02 Nov-00 Mar-00 Source: ADB In addition, the money market in Vietnam is underdeveloped According to Article 6, Law of SBV (2010), the money market is a market in which short run capital instruments are exchanged Capital instruments used in the money market include but are not limited to Treasury Bills, State Bank Bills, Deposit Certificates and others (detailed stipulated in Decision No.11 issued by SBV on 6th of November, 2010) In fact, the monetary instruments are limited as there are no overnight lending facilities, and the maturity of the papers are often seven or 14 days (Annual Report of SBV, 2009, p 21) The winning bids in open market operations rarely reach 100 percent; instead only Stt.010.Mssv.BKD002ac.email.ninhd 77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77t@edu.gmail.com.vn.bkc19134.hmu.edu.vn.Stt.010.Mssv.BKD002ac.email.ninhddtt@edu.gmail.com.vn.bkc19134.hmu.edu.vn Stt.010.Mssv.BKD002ac.email.ninhd 77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77t@edu.gmail.com.vn.bkc19134.hmu.edu.vn.Stt.010.Mssv.BKD002ac.email.ninhddtt@edu.gmail.com.vn.bkc19134.hmu.edu.vn 123doc C.33.44.55.54.78.65.5.43.22.2.4 22.Tai lieu Luan 66.55.77.99 van Luan an.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.C.33.44.55.54.78.655.43.22.2.4.55.22 Do an.Tai lieu Luan van Luan an Do an.Tai lieu Luan van Luan an Do an C.33.44.55.54.78.65.5.43.22.2.4 22.Tai lieu Luan 66.55.77.99 van Luan an.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.C.33.44.55.54.78.655.43.22.2.4.55.22 Do an.Tai lieu Luan van Luan an Do an.Tai lieu Luan van Luan an Do an 39 around 70 to 90 percent, depending on the time of year As a result, the credit institutions are not dependent on SBV in terms of capital In addtion, open market operations mostly focus on the injection rather than absorption of money as the commercial banks are not willing to buy Treasury bills, unless forced to so For example, in March of 2008 the commercial banks were required to buy compulsory SBV bills with 364 days maturity at 7.8 percent per annum, and these bills could not be used for refinancing in open market operations Also in this year, there were a total of 31 T-bill auctions (compared to 43 in 2007) and in four auctions there were no participants These auctions failed to attract other participants except for state-owned commercial banks as these were prominent banks in terms of capital capacity including Vietinbank, Vietcombank; Vietnam Bank for Agricultrure and Rural Development (Annual Report of SBV, 2008, p 33) In 2009, SBV offered SBV bills at maturities of three and six months, but only two out of 68 selling auctions were successful with a total value of VND 102 billion The underdeveloped financial system in Vietnam shows that the initial conditions are not favorable for a good monetary policy mechanism and revenue base for the government In sum, these conditions not support the adoption of I.T now in Vietnam 4.3 Analytical capability of SBV Analytical and forecasting capability of central bank is important in I.T as I.T is forward looking (forecasting inflation using diverse kinds of information) Since 2008, SBV has established the Department of Statistics and Forecasting But for unknown reasons, the forecasting of inflation is implemented by the Ministry of Investment and Planning So far, there are no public forecasting models of inflation, although there are internal models in SBV There is no equivalent to the National Bureau of Economic Research in Vietnam that organizes and publishes relevant working papers from various scholarly sources 4.4 Central bank independence As analyzed in Chapter 2, the independence of the central bank is critically important in adopting I.T In fact, SBV definitely has no independence in political, fiscal Stt.010.Mssv.BKD002ac.email.ninhd 77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77t@edu.gmail.com.vn.bkc19134.hmu.edu.vn.Stt.010.Mssv.BKD002ac.email.ninhddtt@edu.gmail.com.vn.bkc19134.hmu.edu.vn Stt.010.Mssv.BKD002ac.email.ninhd 77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77t@edu.gmail.com.vn.bkc19134.hmu.edu.vn.Stt.010.Mssv.BKD002ac.email.ninhddtt@edu.gmail.com.vn.bkc19134.hmu.edu.vn 123doc C.33.44.55.54.78.65.5.43.22.2.4 22.Tai lieu Luan 66.55.77.99 van Luan an.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.C.33.44.55.54.78.655.43.22.2.4.55.22 Do an.Tai lieu Luan van Luan an Do an.Tai lieu Luan van Luan an Do an C.33.44.55.54.78.65.5.43.22.2.4 22.Tai lieu Luan 66.55.77.99 van Luan an.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.C.33.44.55.54.78.655.43.22.2.4.55.22 Do an.Tai lieu Luan van Luan an Do an.Tai lieu Luan van Luan an Do an 40 as well as instrumental terms But evidence from the developing country inflation targeters shows that most of these countries did not initially have political support and pure independence It is the process of implementing I.T and its effectiveness that persuaded the government to give political support for central bank independence, as in Chile and Brazil However, Vietnam’s fiscal dominance is relatively high as measured by the seigniorage to GDP index10, averaging at percent over the period 2000-2010 This is higher than that of the developing countries as calculated by Masson et al (1997, p 26) in the period of 1980-1995 Fortunately, this index is in downward trend since 2007 as seen in Graph 4.7 Graph 4.7: Seigniorage to GDP in Vietnam Seigniorage to GDP (MB/GDP) 8% 6% 4% 2% 0% Seigniorage 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 3% 3% 2% 4% 3% 4% 6% 7% 4% 3% 1% Source: Author’s calculation based on databases of IMF and GSO Moreover, financial repression in Vietnam is also a manifestation of fiscal dominance The government imposes caps on interest rates, directs credit to prestige state-owned enterprises/projects and maintains state ownership in the banking system Financial repression causes many problems in the money market and control over inflation, which limits the independence of SBV in controlling monetary policy The interest rate ceiling is legally stipulated in Article 476, the Civil Law of The Socialist Republic of Vietnam 2005, in which the interest rate cannot exceed 150 percent of the base rate announced by the State Bank of Vietnam Circular No 02/2011/TT10 According the Masson et al (1997, p 25), seigniorage to GDP index is measured by change of monetary base divided by nominal GDP Stt.010.Mssv.BKD002ac.email.ninhd 77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77t@edu.gmail.com.vn.bkc19134.hmu.edu.vn.Stt.010.Mssv.BKD002ac.email.ninhddtt@edu.gmail.com.vn.bkc19134.hmu.edu.vn Stt.010.Mssv.BKD002ac.email.ninhd 77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77t@edu.gmail.com.vn.bkc19134.hmu.edu.vn.Stt.010.Mssv.BKD002ac.email.ninhddtt@edu.gmail.com.vn.bkc19134.hmu.edu.vn 123doc C.33.44.55.54.78.65.5.43.22.2.4 22.Tai lieu Luan 66.55.77.99 van Luan an.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.C.33.44.55.54.78.655.43.22.2.4.55.22 Do an.Tai lieu Luan van Luan an Do an.Tai lieu Luan van Luan an Do an C.33.44.55.54.78.65.5.43.22.2.4 22.Tai lieu Luan 66.55.77.99 van Luan an.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.C.33.44.55.54.78.655.43.22.2.4.55.22 Do an.Tai lieu Luan van Luan an Do an.Tai lieu Luan van Luan an Do an 41 NHNN (March, 2011) stipulates a specific interest rate ceiling at 14 percent for all deposits at credit institutions An interest rate ceiling in a high inflation environment results in a negative real deposit rate (Graph 4.8) and financial instability Directed credit is legally stipulated in part 3, Article of the Decree No 106/2008/NĐ-CP and Decree No.151/2006/NĐ-CP on Investment and Export Credit, in which some state institutions and firms are given priority access to credit at very low interest rates (equal to the rate of the give year Government Bond plus one percentage point) Directed credit is mostly implemented by the Vietnam Development Bank and state-owned commercial banks The volume of directed credit is not easy to determine because of fragmented data availability But it is not small as the pure data on credit provided by the Vietnam Deveopment Bank divided by total credit in 2009-2010 is 8,2 percent-6,9 percent, respectively (as shown in section 3.2.3) This credit is not controlled by SBV Graph 4.8: Real deposite rate in Vietnam Real Deposite Rate in Vietnam (percentage/year) 10.00 5.00 2011T7 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 (5.00) 2000 - (10.00) Source: Author’s calculation based on databases of GSO and SBV One more important element to be considered here is the state budget deficit in Vietnam as measured by the fiscal balance to GDP, which has averaged 5.4 percent/year during the period 2000-2010 (Graph 4.9) The budget deficit shows that government expenditure is frequently larger than the revenue While the base for revenues such as the taxation and the bonds markets are weak, the fiscal reliance to seigniorage is high Stt.010.Mssv.BKD002ac.email.ninhd 77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77t@edu.gmail.com.vn.bkc19134.hmu.edu.vn.Stt.010.Mssv.BKD002ac.email.ninhddtt@edu.gmail.com.vn.bkc19134.hmu.edu.vn Stt.010.Mssv.BKD002ac.email.ninhd 77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77t@edu.gmail.com.vn.bkc19134.hmu.edu.vn.Stt.010.Mssv.BKD002ac.email.ninhddtt@edu.gmail.com.vn.bkc19134.hmu.edu.vn 123doc C.33.44.55.54.78.65.5.43.22.2.4 22.Tai lieu Luan 66.55.77.99 van Luan an.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.C.33.44.55.54.78.655.43.22.2.4.55.22 Do an.Tai lieu Luan van Luan an Do an.Tai lieu Luan van Luan an Do an C.33.44.55.54.78.65.5.43.22.2.4 22.Tai lieu Luan 66.55.77.99 van Luan an.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.C.33.44.55.54.78.655.43.22.2.4.55.22 Do an.Tai lieu Luan van Luan an Do an.Tai lieu Luan van Luan an Do an 42 Graph 4.9: Fiscal balance to GDP in Vietnam Fiscal balance to GDP in Vietnam 0.0% -1.0% -2.0% -3.0% -4.0% -5.0% -6.0% -7.0% -8.0% 2004 2005 2006 2007 2008 2009 2010 Fiscal balance to GDP -4.9% -4.9% -5.0% -6.0% -4.6% -6.9% -6.2% Source: MoF In sum, central bank independence is absent in Vietnam This is very different from industrial as well as emerging inflation targeters Importantly, fiscal dominance in Vietnam is high, which means that SBV cannot control inflation independently and make the path to I.T much more difficult Stt.010.Mssv.BKD002ac.email.ninhd 77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77t@edu.gmail.com.vn.bkc19134.hmu.edu.vn.Stt.010.Mssv.BKD002ac.email.ninhddtt@edu.gmail.com.vn.bkc19134.hmu.edu.vn Stt.010.Mssv.BKD002ac.email.ninhd 77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77t@edu.gmail.com.vn.bkc19134.hmu.edu.vn.Stt.010.Mssv.BKD002ac.email.ninhddtt@edu.gmail.com.vn.bkc19134.hmu.edu.vn 123doc C.33.44.55.54.78.65.5.43.22.2.4 22.Tai lieu Luan 66.55.77.99 van Luan an.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.C.33.44.55.54.78.655.43.22.2.4.55.22 Do an.Tai lieu Luan van Luan an Do an.Tai lieu Luan van Luan an Do an C.33.44.55.54.78.65.5.43.22.2.4 22.Tai lieu Luan 66.55.77.99 van Luan an.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.C.33.44.55.54.78.655.43.22.2.4.55.22 Do an.Tai lieu Luan van Luan an Do an.Tai lieu Luan van Luan an Do an 43 CHAPTER 5: CONCLUSION AND RECOMMENDATIONS 5.1 Conclusion In brief, the theoretical I.T model ignores many inflation determinants, such as external shocks, fiscal-rooted inflation and exchange rate In other words, inflation is not a pure monetary phenomenon so inflation cannot be controlled purely with monetary tools These characteristics of inflation make it more challenging for I.T adopters, especially developing countries with high dollarization, weak financial systems, weak institutions and unstable macroeconomic conditions It is clear that most of the prerequisites for I.T are not satisfied in Vietnam but some economists still believe that Vietnam can adopt I.T using two arguments First, the evidence of the developing countries as shown in Chapter shows that they all adopted I.T before they met some of the requirements Chile and Brazil fall into this category But Chile did not need to cope with a fiscal deficit like Vietnam, which allowed the central bank to be independent and avoid fiscal-origin inflation Chile’s success in controlling inflation stems from the government’s commitment to low inflation and a strict fiscal rule So the major challenges for Vietnam in adopting of I.T are the lack of independence of the central bank in fiscal and institutional terms The second argument is that price stability has become a priority as of 2011 The Government strongly emphasized the goal of price stability in Resolution No 10/2011/QH13 on SocialEconomic Planning in the period 2011-2015 and announced that the economic growth model is to be restructured, and the growth target for 2012 was reduced to six percent for 2012 and seven percent on average for the period 2011 to 2015 Fiscal and investment discipline were also mentioned in this decree Furthermore, in November of 2011, SBV merged three small commercial banks, which is a signal that SBV is trying to improve the strength of the banking system All these factors are good steps but still not enough to justify the adoption of I.T for the reasons given above Furthermore, adopting I.T means that Vietnam must accept exchange rate instability as the evidence of developing I.T countries such as Brazil and Chile suggests But now SBV still does not permit risk management tools such as exchange rate Stt.010.Mssv.BKD002ac.email.ninhd 77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77t@edu.gmail.com.vn.bkc19134.hmu.edu.vn.Stt.010.Mssv.BKD002ac.email.ninhddtt@edu.gmail.com.vn.bkc19134.hmu.edu.vn Stt.010.Mssv.BKD002ac.email.ninhd 77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77t@edu.gmail.com.vn.bkc19134.hmu.edu.vn.Stt.010.Mssv.BKD002ac.email.ninhddtt@edu.gmail.com.vn.bkc19134.hmu.edu.vn 123doc C.33.44.55.54.78.65.5.43.22.2.4 22.Tai lieu Luan 66.55.77.99 van Luan an.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.C.33.44.55.54.78.655.43.22.2.4.55.22 Do an.Tai lieu Luan van Luan an Do an.Tai lieu Luan van Luan an Do an C.33.44.55.54.78.65.5.43.22.2.4 22.Tai lieu Luan 66.55.77.99 van Luan an.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.C.33.44.55.54.78.655.43.22.2.4.55.22 Do an.Tai lieu Luan van Luan an Do an.Tai lieu Luan van Luan an Do an 44 derivatives Therefore, preparation to move to a more flexible exchange rate regime and permission to use hedging tools are necessary 5.2 REER monetary policy framework is also problematic The REER is an inflation-adjusted, trading partner-weighted exchange rate It is an overall indicator of a nation’s price competitiveness and can signal an overvaluation or undervaluation of the home currency This indicator is a useful guide for achieving the proper mix of exchange rate flexibility and stability (Kenichi Ohno, 2003, p 5) Le Anh Tu Packard (2007) suggests a REER target regime as an alternative to I.T She stated that a REER target would increase competitiveness and support economic growth However, the thesis investigates some evidence which shows that even REER is problematic and can not be a better choice for I.T Kenichi Ohno (2005, p 6) points out some theoretical and empirical problems in applying REER targeting in Vietnam The domestic labor content is very low (10 percent) and the exchange rate pass-through is high Similarly, Michael Goujon (2005, p 568) argues that the pass-through mechanism in a dollarized economy like Vietnam is high This means that the effort to keep the REER target to support economic growth can lead to very high inflation pressure In addition, empirical research shows that the relationship between the REER and output and inflation is not clear: Le and Pfau (2008, pp 9-10) conclude that in the period 1996-2005, the REER had Granger causality to output but not inflation; Nguyen Thi Thuy Vinh (2008, p 33) said that the impact of real exchange rate (RER) between Vietnam and U.S on inflation and output was different: before 1999, RER had Granger causality on inflation but not on output After 1999, RER had Granger causality on output but not on inflation With lag of three to 24 months, the RER explained 20-34 percent the variance of output and 12-35 percent of inflation However, there is a consensus among studies that devaluation would put pressure on inflation in the medium and long term due to the pass-through effect Camen (2006, p 248) showed that in 1996-2005, the nominal exchange rate of USD/VND explained 19 percent inflation variance after one year and 14 percent after two years Bui Thi Kim Thanh (2008, p 38) said that in the period 1990-2008, the exchange rate had a strong Stt.010.Mssv.BKD002ac.email.ninhd 77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77t@edu.gmail.com.vn.bkc19134.hmu.edu.vn.Stt.010.Mssv.BKD002ac.email.ninhddtt@edu.gmail.com.vn.bkc19134.hmu.edu.vn Stt.010.Mssv.BKD002ac.email.ninhd 77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77t@edu.gmail.com.vn.bkc19134.hmu.edu.vn.Stt.010.Mssv.BKD002ac.email.ninhddtt@edu.gmail.com.vn.bkc19134.hmu.edu.vn 123doc C.33.44.55.54.78.65.5.43.22.2.4 22.Tai lieu Luan 66.55.77.99 van Luan an.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.C.33.44.55.54.78.655.43.22.2.4.55.22 Do an.Tai lieu Luan van Luan an Do an.Tai lieu Luan van Luan an Do an C.33.44.55.54.78.65.5.43.22.2.4 22.Tai lieu Luan 66.55.77.99 van Luan an.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.C.33.44.55.54.78.655.43.22.2.4.55.22 Do an.Tai lieu Luan van Luan an Do an.Tai lieu Luan van Luan an Do an 45 impact on domestic inflation due to the pass-through effect Each one percent depreciation led to 0,86 percentage point increase of inflation Therefore, if the government wants to reach the REER equilibrium when domestic prices increase, it will have to devalue the local currency, as a result it will trigger inflation pressure This is a continuous cycle which leads to macroeconomic instability and affects economic growth Therefore, pursuing a REER target to support economic growth by purely depreciating the VND in nominal terms is not enough for two reasons: First, inflation must be controlled For Vietnam, tightening fiscal policy and removing deposit rate caps should be the priority at this moment Second, economic growth dynamics in Vietnam have many other determinants that need to be studied, such as investment efficiency, corruption and the economic structure The competitiveness of an economy must be improved through enterprise capabilities and institutional reform, not only the REER 5.3 Recommendations It is seen that the monetary policy regime as a REER or I.T depends on the political considerations of the Government relating to economic growth or inflation target None of these regimes are the best choice Each choice has its own costs and conditions that require trade offs But before choosing any monetary policy regime, Vietnam needs comprehensive reforms in terms of economic structure and institutions to improve the conduct of monetary policy First of all, dollarization and goldization should be minimized in Vietnam The recent administrative solutions of SBV seems effective in reducing dollarization in Vietnam but the root of these phenomena is the lack of confidence in the value of the local currency So, reducing inflation should be the overriding goal and floating the interest rate is needed Second, the health of the financial system should be improved gradually, starting with supervision and regulation of the financial markets (financial infrastructure), and then building more sophisticated financial tools in the market and strengthening the financial institutions Stt.010.Mssv.BKD002ac.email.ninhd 77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77t@edu.gmail.com.vn.bkc19134.hmu.edu.vn.Stt.010.Mssv.BKD002ac.email.ninhddtt@edu.gmail.com.vn.bkc19134.hmu.edu.vn Stt.010.Mssv.BKD002ac.email.ninhd 77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77t@edu.gmail.com.vn.bkc19134.hmu.edu.vn.Stt.010.Mssv.BKD002ac.email.ninhddtt@edu.gmail.com.vn.bkc19134.hmu.edu.vn 123doc C.33.44.55.54.78.65.5.43.22.2.4 22.Tai lieu Luan 66.55.77.99 van Luan an.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.C.33.44.55.54.78.655.43.22.2.4.55.22 Do an.Tai lieu Luan van Luan an Do an.Tai lieu Luan van Luan an Do an C.33.44.55.54.78.65.5.43.22.2.4 22.Tai lieu Luan 66.55.77.99 van Luan an.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.C.33.44.55.54.78.655.43.22.2.4.55.22 Do an.Tai lieu Luan van Luan an Do an.Tai lieu Luan van Luan an Do an 46 Third, the government should reduce the budget burden and strengthen the revenue base of the government, such as improving the tax system and deepening the bonds markets, thus reducing reliance on the central bank and banking system According to SBV, the government borrowing from SBV is always repaid to SBV within the fiscal year so financing pressure for the budget is not as high as people think However, the interest rate caps and directed credit still exist, which limit the independence of the central bank in conducting monetary policy Thus, financial repression in Vietnam should be removed gradually Fourth, SBV needs technical capacity building to enable SBV to use analytical tools such as econometric models and other forecasting methods and to understand monetary transmission mechanisms better SBV also needs to enhance its accountability, transparency and communication to the public to anchor inflation expectations After these conditions have been met, the Government will be in a better position to select a suitable monetary policy regime Stt.010.Mssv.BKD002ac.email.ninhd 77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77t@edu.gmail.com.vn.bkc19134.hmu.edu.vn.Stt.010.Mssv.BKD002ac.email.ninhddtt@edu.gmail.com.vn.bkc19134.hmu.edu.vn Stt.010.Mssv.BKD002ac.email.ninhd 77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77t@edu.gmail.com.vn.bkc19134.hmu.edu.vn.Stt.010.Mssv.BKD002ac.email.ninhddtt@edu.gmail.com.vn.bkc19134.hmu.edu.vn 123doc C.33.44.55.54.78.65.5.43.22.2.4 22.Tai lieu Luan 66.55.77.99 van Luan an.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.C.33.44.55.54.78.655.43.22.2.4.55.22 Do an.Tai lieu Luan van Luan an Do an.Tai lieu Luan van Luan an Do an C.33.44.55.54.78.65.5.43.22.2.4 22.Tai lieu Luan 66.55.77.99 van Luan an.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.C.33.44.55.54.78.655.43.22.2.4.55.22 Do an.Tai lieu Luan van Luan an Do an.Tai lieu Luan van Luan an Do an 47 REFERENCES Vietnamese documents Phạm Thế Anh (2010), “Xác định nhân tố định lam phát Việt Nam”, Tạp chí Kinh tế Phát triển, accessed on 16/5/2011 at: http://www.tinkinhte.com/ty-le-lam-phat-oviet-nam/ts-pham-the-anh-xac-dinh-cac-nhan-to-quyet-dinh-lam-phat-o-viet-nam.nd5sjd.101071.94.1.html Bộ Tài (2012), “Số liệu nước”, accessed on 22/3/2012 at: http://www.mof.gov.vn/portal/page/portal/mof_vn/1351583/2126549/2115685 Chính phủ (2006), “Nghị định số 151/2006/NĐ-CP tín dụng đầu tư tín dụng xuất nhà nước”, accessed on 3/4/2012 at: http://thuvienphapluat.vn/archive/Nghi-dinh/Nghidinh-151-2006-ND-CP-tin-dung-dau-tu-xuat-khau-cua-Nha-nuoc-vb16078t11.aspx Chính phủ (2008), “Nghị định số 106/2008/NĐ-CP sửa đổi, bổ sung số điều Nghị định số 151/2006/NĐ-CP ngày 20 tháng 12 năm 2006 Chính phủ tín dụng đầu tư tín dụng xuất nhà nước”, accessed on 3/4/2012 at: http://tailieu.vn/xem-tailieu/nghi-dinh-so-106-2008-nd-cp.139178.html Đinh Vũ Trang Ngân (2010), “Bài giảng Kinh tế Vĩ mô: Tiền tệ lạm phát”, Chương trình Giảng dạy Kinh tế Fulbright, accessed on 2/4/2012 at: http://ocw.fetp.edu.vn/ocwmain.cfm?academicyearid=16&languageid=1 Ngân hàng Nhà nước Việt Nam (2008 - 2009), “Báo cáo thường niên” Ngân hàng Nhà nước Việt Nam (2010), “Quyết định số 11/QĐ-NHNN danh mục giấy tờ có giá sử dụng giao dịch Ngân hàng Nhà nước”, issued on 06/01/2010, accessed on 3/4/2012 at: http://thuvienphapluat.vn/archive/Quyet-dinh/Quyet-dinh-11-QDNHNN-danh-muc-giay-to-co-gia-duoc-su-dung-trong-cac-giao-dich-Ngan-hang-Nha-nuocvb101682t17.aspx Ngân hàng Nhà nước Việt Nam (2011), “Thông tư số 02/2011/TT-NHNN qui định mức lãi suất huy động vốn tối đa đồng Việt Nam”, issued on 03/03/2011, accessed on 3/4/2012 at: http://thuvienphapluat.vn/archive/Thong-tu/Thong-tu-02-2011-TT-NHNN-muc-lai-suathuy-dong-von-toi-da-bang-dong-Viet-Nam-vb119588t23.aspx Stt.010.Mssv.BKD002ac.email.ninhd 77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77t@edu.gmail.com.vn.bkc19134.hmu.edu.vn.Stt.010.Mssv.BKD002ac.email.ninhddtt@edu.gmail.com.vn.bkc19134.hmu.edu.vn Stt.010.Mssv.BKD002ac.email.ninhd 77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77t@edu.gmail.com.vn.bkc19134.hmu.edu.vn.Stt.010.Mssv.BKD002ac.email.ninhddtt@edu.gmail.com.vn.bkc19134.hmu.edu.vn 123doc C.33.44.55.54.78.65.5.43.22.2.4 22.Tai lieu Luan 66.55.77.99 van Luan an.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.C.33.44.55.54.78.655.43.22.2.4.55.22 Do an.Tai lieu Luan van Luan an Do an.Tai lieu Luan van Luan an Do an C.33.44.55.54.78.65.5.43.22.2.4 22.Tai lieu Luan 66.55.77.99 van Luan an.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.C.33.44.55.54.78.655.43.22.2.4.55.22 Do an.Tai lieu Luan van Luan an Do an.Tai lieu Luan van Luan an Do an 48 Quốc hội 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77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77t@edu.gmail.com.vn.bkc19134.hmu.edu.vn.Stt.010.Mssv.BKD002ac.email.ninhddtt@edu.gmail.com.vn.bkc19134.hmu.edu.vn Stt.010.Mssv.BKD002ac.email.ninhd 77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77t@edu.gmail.com.vn.bkc19134.hmu.edu.vn.Stt.010.Mssv.BKD002ac.email.ninhddtt@edu.gmail.com.vn.bkc19134.hmu.edu.vn 123doc C.33.44.55.54.78.65.5.43.22.2.4 22.Tai lieu Luan 66.55.77.99 van Luan 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