Inflation in vietnam in the period of 2007 2016,graduation thesis

STATE BANK OF VIETNAM BANKING ACADEMY OF VIETNAM Foreign Language Faculty - - GRADUATION THESIS INFLATION IN VIETNAM IN THE PERIOD OF 2007- 2016 Lecturer Student Class Student Code : : : : Nguyen Phuong Lan (M.A) Bui Thi Thom K16ATCB 16A7510142 Hanoi, 22nd May, 2017 STATE BANK OF VIETNAM BANKING ACADEMY OF VIETNAM Foreign Language Faculty - - GRADUATION THESIS INFLATION IN VIETNAM IN THE PERIOD OF 2007- 2016 Lecturer udent Class Student Code : : : : Nguyen Phuong Lan (M.A) Bui Thi Thom K16ATCB 16A7510142 Hanoi, 22nd May, 2017 Bui Thi Thom- K16ATCB Page i GRADUATION THESIS ACKNOWLEDGEMENT First and foremost, I would like to express my sincere gratitude to Ms Nguyen Phuong Lan, my conscientious supervisor, for her consecutive support, patience, motivation, and immense knowledge Her valuable guidance tremendously helped me in carrying out the research and writing this thesis Without her persistent help, this thesis could not have been successfully conducted I would like to express the deepest appreciation to lectures of Banking Academy of Vietnam for imparting comprehensive knowledge to me My graduate experience benefitted greatly from high-quality courses that the seasoned lectures organized My sincere thanks also go to Mr Pham Van Tu and Ms Nguyen Mai Anh for offering internship opportunities in CJ CGV- CGV Mipec branch, and giving me chances of working on exciting projects They provided a friendly and cooperative working environment, useful feedbacks and insightful comments on my work Finally, I must express my profound gratitude to my parents, my sister, my brother- inlaw, my boy friend, and my best friends: Hang, Tien, Thao, Thuy Van, Hong van, Thanh and Diu for providing me with wholehearted support and continuous encouragement throughout my years of study and the process of researching and writing this thesis This accomplishment would not have been possible without them Bui Thi Thom- K16ATCB Page i GRADUATION THESIS DECLARATION I declare that this thesis is the product of my own work and effort Where other sources of information have been used, they have been acknowledged Signature Bui Thi Thom Bui Thi Thom- K16ATCB Page ii GRADUATION THESIS LIST OF ABBREVIATION ABBREVIATION WTO AD- AS FULL NAME World Trade Organization Aggregate demand–Aggregate supply CPI Consumer Price Index PPI Producer Price Index GDP Gross Domestic Product US The United State EU European Union FDI Foreign Direct Investment F&B Food & Beverage SOEs State-owned enterprise PPP MDGs ASEAN Purchasing Power Parities Millennium Development Goals Association of Southeast Asian Nations OMO Open Market Operations SBV State Bank of Vietnam TTP Trans-Pacific Strategic Economic Partnership Agreement Interest rate IR Bui Thi Thom- K16ATCB Page iii GRADUATION THESIS TABLE OF CONTENT ACKNOWLEDGEMENT DECLARATION ii LIST OF ABBREVIATION iii TABLE OF CONTENT iv TABLE OF FIGURES vi ABSTRACT vii I INTRODUCTION 1 Rationale to the thesis Scope of the study Research methodology Structural organization of the thesis II BACKGROUND KNOWLEDGE Definition Reasons for inflation 2.1 Demand- pull inflation 2.2: Cost- push inflation 2.3 Excessive money supply Classification of inflation 3.1 Moderate Inflation 3.2 Galloping Inflation 3.3 Hyperinflation Measurement of inflation 4.1 Consumer Price Index (CPI) 4.2 Producer Price Indexes (PPI) 4.3 Gross Domestic Product (GDP) Possible impacts of inflation Bui Thi Thom- K16ATCB Page iv GRADUATION THESIS 5.1 Positive impacts 5.2 Negative impacts Solutions to inflation prevention III INFLATION IN VIETNAM FROM 2007 TO 2016 Galloping inflation 2007- 2008 10 a Causes 10 b Effects 12 Moderate inflation in 2009 15 b Effects 16 Galloping inflation in 2010-2011 18 a) Causes 19 b) Effect 22 Inflation in 2012-2016 23 a Causes 23 b) Effects 25 IV SOLUTIONS OF THE GOVERNMENT 29 Monetary policy and fiscal policy 29 Supply – demand balance and price control 34 Stimulate consumption 35 Trade deficit reduction 36 V RECOMMENDATIONS 39 Achievements 39 Limitations 39 Recommendations 40 Conclusion 43 Reference 44 Bui Thi Thom- K16ATCB Page v GRADUATION THESIS TABLE OF FIGURES Figure 1: Inflation rate and CPI index from 2007-2016(%) Figure 2: Economic growth in Vietnam (2004-2007) (percentage) 14 Figure 3: CPI index 2009 15 Figure 4: CPI index in 2010 and 2011 18 Figure 5: Fluctuation in the price of gasoline 20 Figure 6: Price of electricity from 2009 to 2011 20 Figure 7: Inflation rate of Southeast Asian countries in 2011 21 Figure 8: Monetary and Fiscal policy from 2012- 2016 25 Figure 9: GDP growth from 2012 to 2016 (US billion) 27 Figure 10: Interest rate from 2008-2015 (%) 30 Figure 11: Reserve requirement of credit institutions in Vietnam 31 Figure 12: Vietnam export from 2008-2016 37 Figure 13: Balance of trade of Vietnam 37 Bui Thi Thom- K16ATCB Page vi GRADUATION THESIS ABSTRACT Curbing or struggling with inflation is an insurmountable issue, requiring a huge amount of time of scientists, economists, researchers, and policymakers to work out suitable solutions Inflation is considered as a double-edged sword On one hand, it stimulates economic growth On the other hand, when inflation is high and uncontrollable, it causes serious consequences for the economy as well as the society Keeping inflation at a consistent level to achieve high economic growth is an inextricable question, and when inflation explodes, it is difficult to find effective methods to tackle with this problem Recently, high inflation has profoundly affected the Vietnamese economy, especially in the period of 2007- 2008 and 2010- 2011 This phenomenon has attracted attention of people from all walks of life and the government Given the fact that inflation is one of the key factors boosting Vietnamese economy in particular as well as the world in general, and it is also a factor holding the economy back The author expect that the topic “Inflation in Vietnam in the period of 2007- 2016” will help readers have comprehensive understanding of inflation, Vietnamese inflation situation in recent years and cooperation of monetary policies, fiscal policies and other macro measures that the government proposed to handle this problem With limited time and capacity, the author hopes for receiving sincere suggestions of teachers and readers to make this thesis more complete Bui Thi Thom- K16ATCB Page vii GRADUATION THESIS I INTRODUCTION Rationale to the thesis In recent years, Vietnam has achieved impressive economic attainments, such as becoming an official member of WTO, successfully negotiating myriad crucial commercial agreements, significantly reducing hunger and poverty and narrowing the gap between the rich and the poor However, along with economic growth, Vietnam coped with enormous negative economic affairs Inflation was considered as one of the most serious problems, resulting in trepidation for the government, economists and the public Inflation is a macro-economic phenomenon that has dramatically negative influences on the economic development Take galloping inflation in the period of 2007- 2008 as an example Soaring price of goods and plummeting purchasing power originated from high inflation rate, leading to the collapse of thousands of companies and financial organizations Consequently, more than four million people lived below poverty line From 2009, the economy showed signs of recovery; however, Vietnam‟s fledgling economy was still unstable, illustrated by fluctuation of inflation rate To stabilize the macro-economy, the government implemented variety of monetary and fiscal policies, such as adjusting interest rate and requirement reserve, balancing supply and demand of goods The Ministries, agencies and organizations cooperated to resolve consequences of inflation However, it is undeniable that curbing inflation required a huge amount of time, money and effort Hence, gaining lessons from reality plays an important role in proposing strategic plans for upcoming years Springing from practical requirements, the study of “Inflation in the period of 20072016” is carried out for the purposes of dealing with following issues:  Definition, causes and effects of inflation and measures to curb inflation in theory  Main reasons and consequences of inflation in Vietnam in the period of 2007-2016  Solutions that the government applied to tackle inflation  Recommendations for further plans Bui Thi Thom- K16ATCB Page GRADUATION THESIS the economy faced risk of deflation To solve this problem, the government adjusted the fiscal and monetary policies to stabilize the macroeconomic growth and support business activities of enterprises in the following years Consequently, since March 18, 2014, refinancing interest rate was 6.5%, which was much lower than the level of 15% at the end of 2011, and the discount rate was 4.5% The table bellow shows the government‟s policies on interest rate from 2008- 2015 Target 2008 2009 2010 2011 2012 2013 2014 2015 GDP growth 5.66 5.4 6.42 6.24 5.25 5.42 5.98 6.68 Inflation 19.9 6.5 11.75 18.3 6.81 6.04 1.84 0.63 Prime IR 8.5 9 9 9 Discount IR 7.5 13 7 6.5 6.5 9.5 15 4.5 4.5 Refinancing IR Interbank IR (USD/VND) 16.977 17.941 18.932 20.828 20.828 21.036 21.246 21.890 Surplus budget 4.58 6.9 5,5 4.4 5.36 6.6 5.69 5.3 (%GDP) Figure 10: Interest rate from 2008-2015 (%) (Source: GSO, Ministry of Finance, SBV) In conclusion, in this period, the tightening fiscal and monetary policies of this period were applied through measures, such as increasing prime interest rate, raising discount interest rate, increasing reserve requirement, limiting credit growth and money supply, discouraging enterprise to lend money and declining money supply The required reserve tools The required reserve ratio was adjusted in line with monetary policy and fiscal policy in each period To balance surplus liquidity in the banking system and implement tight monetary policy for the purpose of curbing inflation, besides interest instruments, the SBV increased the reserve requirement and surged interest rate of required reserve for Bui Thi Thom- K16ATCB Page 30 GRADUATION THESIS credit institutions in mid 2007 and early 2008 By the end of 2008, the SBV reduced required reserve to decrease liquidity pressure and mobilization costs for credit institutions with the aims of encouraging credit institutions to increase lending activities Accordingly, the reserve requirement for deposits in VND dong dropped sharply from 11% in mid-2008 to 3% in the first quarter of 2009, and this level was remaining until now The ratio of foreign currency deposits decreased more slowly, from 11% in 2008 to 4% in 2010 Since 2011, required reserve ratio for deposits in USD in accordance with Decision No 1925 / QĐ-NHNN dated 26/8/2011 (applied from September 2011 reserve period) was set as table below: VND deposit Non- term Credit institutions deposit Foreign deposit Non- term > 12 deposit > 12 and < 12 months and < 12 months months months State-owned commercial banks (excluding Agribank), urban joint stock commercial banks, 3% 1% 8% 6% 1% 1% 7% 5% 1% 1% 7% 5% 0% 0% 0% 0% foreign bank branches, joint venture banks, financial and financial leasing companies Vietnam Bank for Agriculture and Rural Development Rural joint stock commercial banks, cooperative banks, central people's credit funds Credit institutions having required reserve under VND 500 million, Vietnam Bank for Social Policies Figure 11: Reserve requirement of credit institutions in Vietnam Source: The State Bank of Vietnam The open market operation (OMO) Started from 7/2000, open market operations acted as a main economic regulatory tool of the SBV In the first seven months of 2008, along with the implementation of monetary policy and fiscal policy, such as increasing reserve requirement and prime interest rate to curb inflation, the State Bank of Vietnam sold treasury bills for terms of Bui Thi Thom- K16ATCB Page 31 GRADUATION THESIS 182 and 364 days The interest rate for the 182-day term was 7.5% per annum, for a 364-day term was 7.75% per annum At the same time, in order to increase short-term capital for credit institutions, the SBV conducted selling sessions to sell short- term valuable papers (7, 14, 21, 28 days) The daily bid volume was based on capital and monetary market movements In 2009, the SBV implemented expansionary monetary policy to facilitate liquidity and create conditions for credit institutions to expand their credit effectively In the first half of 2009, the SBV conducted 14-day buying sessions The interest rates dropped from 9% to 7% / year to provide short-term capital for the economy and enable credit institutions to meet their capital needs In 2010, to control increasing inflation, the SBV offered 7-day, 14-day and 28-day notes with lower interest rates (interest of 7-day term decreased from 7.8% to 7.5% to 7%, 14-day term fell from 8% to 7.5% / year, 28- day term was 8% / year) Average bid volume was about 5400 billion / session In 2011, to curb high inflation, the SBV continued to implement tight monetary policy In June 2011, the SBV injected VND14188.4billion and attracted VND 20669.7billion Thus, the SBV bring back VND64811.3billion through open market operations The exchange rate The exchange rate policy plays a vital role in stabilizing Vietnam economy That Vietnam participated in WTO raised foreign investors‟ confidence, causing drastic rise in capital inflows In addition, domestic currency supply in the second half of 2007 was uncontrollable, so the band for exchange rate fluctuation increased from 0.5% to 0.75% on 24thDecember 2007, to 1% on 10thMarch 2008 To solve this problem, the SBV banned commercial banks from buying and selling USD through the third currency, and intervened in the foreign exchange market However, these measures did not meet expectation The interest rate on VND -dominated deposit was reported at 15.5% while it was recorded at 14% The exchange rate instruments were adjusted significantly to reflect the supply and demand of the market In the period of 20102011, the exchange rate was put under pressure, and the foreign exchange market was volatile To resolve this problem, in February 2011, the SBV increased the exchange Bui Thi Thom- K16ATCB Page 32 GRADUATION THESIS rate by 9.3%, and decreased the trading amplitude from + 3% to + 1% After that, the State Bank of Vietnam intervened flexibly in the market in order to stabilize the exchange rate, thus reducing dollarization In 2012 and 2013, the SBV aimed to control the exchange rate by no more than 2-3% per year to control the depreciation of the VND, enabling enterprises to take the initiative in setting up and realizing business plans The fact was that in 2013, the SBV raised exchange rate by 1% on 28th June In 2014, the SBV adjusted the exchange rate of 1% on 19 September, and this rate was unchanged until the end of the year In 2015, due to global economic recession along with the devaluation of the Chinese Yuan and expectation of increase in interest of the Federal Reserve (FED), the exchange rate in Vietnam faced risks of instability To cope with this adversity, the SBV devalued VND three times in 2015 (in January, May and August) Along with the devaluation of the domestic currency, the SBV adjusted the exchange rate band from + -1% to + -2% on 12nd August, and to + -3% on 19th August The SBV proactively announced the exchange rate orientation of about 1% -3% per annum (the adjustment rate is no more than 1% in the last months of 2011, no more than 2% -3% in 2012 and 2013, no more than 1% -2% in 2014 and no more than 2% in 2015) to enhance transparency and market orientation This also enabled enterprises to develop production and business plans The frequency of exchange rate adjustment also decreased gradually compared to the previous period After adjusting average interbank exchange rate of 9.3% per annum in mid-February 2011, each year, the exchange rate was adjusted up slightly over the years (1% -2% per annum) In the operating process, besides direct measures such as announcing the interbank exchange, SBV actively coordinated synchronously with monetary regulatory instruments to minimize the pressures that significantly affected the stability of the exchange rate Accordingly, the State Bank focused on operating interest rate tools, including domestic currency and foreign currency interest rates in line with macroeconomic movement This ensured the value of the domestic currency and encouraged the public to hold VND instead of USD Bui Thi Thom- K16ATCB Page 33 GRADUATION THESIS Other tools After floating interest rates for a long time, the State Bank of Vietnam used the ceiling interest rate instrument to limit the interest rate race that could fluctuate the liquidity of the monetary market Because inflation was in control, the government set ceiling deposit rate of 12% per annum in February 2008 and raised to 14% per annum from June 2008 In October 29, 2014, under the Decision No 2173 / QD-NHNN dated October 28, 2014, the State Bank of Vietnam stipulated the mobilizing ceiling interest rate for term deposits from one to less than six months of 5.5%, and non-term and less than month of 1% In addition, in order to control credit growth to curb inflation, the State Bank of Vietnam requested credit institutions to control credit growth in parallel with assured credit quality The SBV also required credit institutions to limit debt for securities business, and then continued to control the level of securities investment loans not above 20% of charter capital Since 2009, along with traditional expansionary monetary measures, the State Bank of Vietnam implemented the 4%- interest- subsidy program for all loans, which solved difficulties for businesses In 2011, because of high inflation pressure, along with the traditional tight monetary tools, the SBV also used other measures to control currency, such as curbing credit growth no more than 20%, decreasing foreign currency loans and applying ceiling interest rate on VND and foreign currencies In 2012 and 2013, the SBV implemented expansionary monetary policy, and continued to control credit growth However, the level of control was higher than that of the previous year In 2014, the total means of payment increased about 16-18%, and credit went up by 1214% In conclusion, the SBV and the Ministry of Finance flexibly intervened in the market through regulatory instruments to stabilize the macroeconomic Supply – demand balance and price control Price control was applied in the period from 2007 to now In 2008, after a rise in February, the prices of cements, steel and coal remained unchanged until June 2008 In addition, prices of electricity and water were stabilized To achieve this goal, Prime Minister Nguyen Tan Dung required the ministries and relevant agencies to find out factors resulting in the rising prices of commodities Accordingly, authorities focused Bui Thi Thom- K16ATCB Page 34 GRADUATION THESIS on implementing the sustainable solutions to stabilize the market and prices of goods and boost productivity to ensure balance between demand and supply of goods This adjustment aimed at controlling increasing price of essential commodities to decease high inflation rate From 2009- 2010, the Ministry of Finance regulated fuel price in accordance with the Government‟s Decree No 84/2009/ NĐ- CP on fuel trading to ensure that the domestic price was in line with the global prices In 2011, according to the proposal of Ministry of Finance, the retail price of petrol fell by VND 500/liter nationwide To balance between supply and demand of goods, the Ministry of Planning and Investment coordinated with other relevant agencies monitored and controlled the supply and demand of the goods The government required Ministries to detect and timely deal with arising imbalances of goods The Ministry of Trade took responsible for regulating nationwide commodities, especially the essential commodities that play an important role in solving imbalances in each region For the essential commodities such as food, sugar, petrol, cement, the control of supply and demand balance was carried out quarterly and monthly Stimulate consumption The Ministry of Finance cooperated with relevant agencies to apply necessary measures and impose reasonable tax and fee on commodities for the sake of exporters and traders of steel, cement, and other goods The Ministry of Finance also reduced import tax on input product for export- oriented industries such as textile, footwear, seafood, eschew nut, wood, and pharmaceuticals Some exported goods were refunded value- added tax until 2012 The Ministry of Industry and Trade coordinated with the ministries, branches and the People's Committees of the provinces and cities to implement goods reserve programs aiming at stabilizing the market and ensuring the supply and demand of goods and services In addition, branches actively created conditions to boost production and business activities, stimulate consumption, increase purchasing power and reduce inventory These solutions were carried out timely to develop the domestic market Bui Thi Thom- K16ATCB Page 35 GRADUATION THESIS The Ministry of Agriculture and Rural Development focused on implementing policies of supporting the production of livestock and aquaculture In addition, the Ministry promoted the program of rice stockpiles in the Mekong Delta to improve the efficiency of rice exports The Ministry of Information and Communications carried out propaganda activities to ensure that policies were conducted adequately, transparently in order to create a consensus of the society Corporations, business organizations and individuals continued restructuring their production and business in ways that are more effective They also renovated technologies and reduced production costs, promoted trade activities to expand regional and non- regional consumption market The Prime Minister required ministries and agencies to implement "Vietnamese people use Vietnamese goods" programs They also conducted propaganda and advocacy programs among agencies, enterprises, party members, and employees to enhance aware of people of the rights and responsibilities of producers and consumers in the production and consumption of goods The ministries strengthened the inspection and supervision activities to ensure the quality of goods, circulation of the market and distribution and consumption of goods Trade deficit reduction Reducing trade deficit was one of the effective solutions to curb high inflation in Vietnam in the period of 2007- 2016 Increasing exports was considered as the most effective measure for Viet Nam to reduce trade deficit Because of huge trade deficit, the Prime Minister required the Ministry of Finance, the Ministry of Agriculture and Rural Development to strictly control the price of gasoline, oil and essential foods Following the Prime Minister‟s official message, which instructed ministries to design their own socio-economic, the Ministry of Trade requested businesses and localities to boost exports, focusing on potential products such as rice, handicrafts, garments and aquatic products In the last ten year, Vietnam's exports showed upward trend Vietnam main exports included telephone and spare parts (19% of the total shipments) and textiles (14%) Others included electronics, computers and components (10%), shoes and footwear (7%) and other machinery, tools and spare parts (5%) Main export Bui Thi Thom- K16ATCB Page 36 GRADUATION THESIS partners were the United States (20.7% of the total exports), China (10.6%) Japan (8.7%) Others included South Korea (5.5%), Hong Kong (4%) and Germany (4%) The figure bellow shows the increase trend in Vietnam‟s export activities: Figure 12: Vietnam export from 2008-2016 Source: www.tradingeconomics.com,General Statistics of Vietnam Another measure that the government applied to control inflation in Vietnam was reducing import The government monitored and published the list of non- essential goods, domestically- produced commodities that was unnecessary to the development of the In general, Vietnam import achieved desired result The balance of trade of Vietnam in recent years showed positive changes Figure 13: Balance of trade of Vietnam Source: www.tradingeconomics.com,General Statistics of Vietnam Bui Thi Thom- K16ATCB Page 37 GRADUATION THESIS However, in the long-term, local businesses should restructure imports by shifting to the import of machinery and high-tech production chains along with reducing purchases of consumer goods from abroad Furthermore, domestic businesses should diversify their import markets to lessen dependence on the traditional ones Bui Thi Thom- K16ATCB Page 38 GRADUATION THESIS V RECOMMENDATIONS Achievements Looking back to the whole process of Vietnam economic growth, inflation was an obstacle that held economic development back In the period of 2007- 2016, Vietnam economy witnessed volatile movement of inflation Thanks to observation and timely guides of the government, Vietnam economy had positive changes and gained outstanding achievements Firstly, the macro- economy was gradually stable, and economic growth showed positive signs In 2016, GDP growth rate of Vietnam was 5.5%, higher than other Asian countries‟ rate Foreign reserve reached USD 41billion, the highest level ever Furthermore, business environment was significantly improved, and Vietnam ranked at 82 among 190 countries in the world Secondly, flourishing business development was an outstanding result For the first time, more than 110,000 new enterprises were established, with total registered capital of over VND 891 trillion, the highest level ever In addition, Vietnam signed TTP agreement, creating opportunities for Vietnam to trade with other countries and stimulate trade volume Thirdly, attracting foreign investment set a record Implemented FDI reached $ 15.8 billion, which was the highest level ever By 26thDecember, Vietnam had 2,556 new FDI projects, with total registered capital of USD15.18 billion Fourthly, under the direction of the government, the Prime Minister, the political system took part in the prevention of natural disasters, droughts, salinity intrusion and joined in environmental protection Limitations Besides positive changes, it was undeniable that Vietnam economy seems still more vulnerable than other Asian countries and faces threads of inflation again Vietnam economy had some limitations: Bui Thi Thom- K16ATCB Page 39 GRADUATION THESIS The first limitation is that inflation causes came from existing economic limitations, such as sluggish growth model and ineffective economic structures that were applied for many years Moreover, given solutions were carried out slowly, and they were lack of synchronicity Secondly, international rank in terms of competitiveness and innovation went down Vietnam ranked at sixtieth of global competitiveness rating, which declined four places, so Vietnam was at sixth among ASEAN countries The global innovation index in 2016 has fallen seven places, ranking 59th out of 128 countries and territories, and 4th in Southeast Asia These results stemmed from ineffective policies of the government, a shortage of knowledge as well as weak competitive ability of enterprises Therefore, it is necessary to build up a particular strategy for sustainable development Thirdly, there were lack of tight cooperation between “tangible hand” of the government and “intangible hand” of the market, which was barrier for synchronous development Fourthly, the economic knowledge was applied in practice passively and theoretically, which was not suitable for Vietnamese culture and habits Finally, the enterprise did not actively propose preventive measures, and awareness of people about inflation was still limited In this period, many weak commercial banks lost capital, and a number of banks were bought at dong Consequently, Vietnam frequently coped with unstable economic situation Recommendations In the prospect of inflation again, Vietnam need to take steps to enhance ability of preventing inflation Some recommendations have been made for the purpose of proposing strategic plans: Firstly, critical tasks and targets should be carried out timely To cope with impacts of the globally financial crisis, the government should set goals and primary tasks, which Bui Thi Thom- K16ATCB Page 40 GRADUATION THESIS are curbing inflation, stabilizing macro economy and adjusting credit growth reasonably Secondly, besides concentrating on goals of inflation control and macroeconomic stability, the government needs to ensure sustainable economic To achieve these goals, the government should focus on solutions of adjusting interest rates, loan growth, demand- supply relationship and domestic market development They should encourage people to participate in "Vietnamese people use Vietnamese goods" program to boost domestic production It is necessary for the government to take advantage of trade agreements to expand export markets The third lesson is that, the State‟s "tangible hand" and "intangible hand" of the market should be strictly incorporated The "intangible hand" plays an important role of creating an competitive environment for market players However, to promote efficiency of the "the invisible hand", it is necessary to base on fair competition To compete, there must be many businesses with diverse types of activities because monopoly is the enemy of competition The "visible hand" acts as a tool of limiting negative impacts of the market mechanism and shielding the underprivileged factors In addition, the implementation of controlling and orienting the market price of some goods and services is necessary The fourth lesson is that when the goals are set, it is crucial to propose operative solutions The experience of curbing inflation shows that from March to July, the inflation rate decreases while from August to September, inflation rate surges Therefore, the proposed measures should focus on increasing inflation in period from March to July and curbing rising inflation from August to September Fifthly, the government needs to combine basic operating solutions with reality The solutions applied in reality play a role of boosting the flexibility in operation For example, from Lunar New Year to August and September, consumer demand often plummets Therefore, some measures such as lowering interest rates, raising credit, adjusting minimum wages, adjusting prices should be applied instead of implementing in the first two months and the last three months of years year However, these Bui Thi Thom- K16ATCB Page 41 GRADUATION THESIS solutions have effects for a short term because they have some unexpected results such as unstable inflation rate Fundamental measures have a long-term effect because they ensure the sustainable development of the economy For example, in order to curb inflation, the measures need to affect the factors of inflation, such as the cost- push, demand- pull, fiscal and monetary policy, especially the underlying factors such as psychological of people The main causes of inflation are low investment efficiency, low labor productivity Therefore, in order to develop the economy sustainably, it is necessary to transform the growth model and restructure the economy The sixth lesson is creating social consensus in implementing policies Therefore, the information must be objective, accurate, punctual and comprehensive Furthermore, authorities must accurately forecast the movement of the market to propose reasonable solutions The seventh lesson is enhancing self- anti- inflation ability of enterprises One of the main causes of inflation is cost- push Therefore, reducing production cost acts as a long- term measure to curb inflation To achieve this goal, the enterprises need to apply modern technological innovation to reduce cost of production as well as boost productivity The business need to protect themselves from negative effects of inflation Bui Thi Thom- K16ATCB Page 42 GRADUATION THESIS CONCLUSION Inflation is the rate at which the general level of prices for goods and services is rising, and, consequently, the purchasing power of currency is falling Inflation is divided into three main types: moderate inflation, galloping inflation and hyperinflation Inflation is an insurmountable and complex issue On one hand, moderate inflation plays a role as a catalyst boosting economic development When the economic structure is property implemented, and technological progress is applied effectively, inflation is a tool of stimulating sustainable development and combating economic recession In order to restrain inflation, stabilize the macro economy and achieve goals of economic growth, social security, industrialization and modernization of Vietnam in the coming years, the government needs to improve policies and enhance management ability to deal with external influences and build a wealthy economy On the other hand, inflation has negative impacts on the economy Rising inflation decrease purchasing power and devaluing currency‟s value; as a result, enterprises face many difficult in distribution as well as production Therefore, it is necessary to keep inflation rate at suitable level The author really wants to study this topic more thoroughly However, in the process of writing this essay, due to limited knowledge about economy, shortcomings are unavoidable The author hopes that the lecturers will sympathize and give author recommendations to complete this essay Bui Thi Thom- K16ATCB Page 43 GRADUATION THESIS REFERENCE Oxford Dictionary Inflation Definition Retrieved from http://www.oxfordlearnersdictionaries.com/ John Black, Nigar Hashimzade, and Gareth Myles Dictionary of economics(3ed) Fujino, S A Neo-Keynesian Theory of Inflation and 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