Tóm tắt ta the effects of the united states’ nconventional monetary policy on financial market and real economy evidence in vietnam

Tóm tắt ta the effects of the united states’ nconventional monetary policy on financial market and real economy evidence in vietnam Tóm tắt ta the effects of the united states’ nconventional monetary policy on financial market and real economy evidence in vietnam Tóm tắt ta the effects of the united states’ nconventional monetary policy on financial market and real economy evidence in vietnam Tóm tắt ta the effects of the united states’ nconventional monetary policy on financial market and real economy evidence in vietnam Tóm tắt ta the effects of the united states’ nconventional monetary policy on financial market and real economy evidence in vietnam

MINISTRY OF EDUCATION STATE BANK OF VIET NAM AND TRAINING HO CHI MINH UNIVERSITY OF BANKING NGÔ SỸ NAM THE EFFECTS OF THE UNITED STATES’ UNCONVENTIONAL MONETARY POLICY ON THE FINANCIAL MARKET AND REAL ECONOMY: EVIDENCE IN VIETNAM PH D THESIS SUMMARY MAJOR: FINANCE AND BANKING Code : 9340201 HO CHI MINH CITY, MARCH – 2024 1 1 CHAPTER 1: INTRODUCTION 1.1 MOTIVATION OF RESEARCH Central banks predominantly employ a very short-term interest rate as their primary policy tool However, the effectiveness of conventional monetary policy (CMP) instruments has not yielded the desired outcomes in terms of financial stability, deficit reduction, and debt reduction, particularly considering recent financial and debt crises and the more recent pandemic and its devastating effects on the global economy In response to this situation, unconventional monetary policy (UMP) emerged and played a pivotal role in managing central banks' monetary policies, particularly during prolonged crises Asian economies are affected by the GFC and the UMP of advanced economies, especially the US, in different ways The effects of AEs' UMP measures can be transmitted through various channels, such as the portfolio rebalancing channel, the interest rate channel, the exchange rate channel, the asset price channel, and the credit channel This research in Vietnam was driven by the need to thoroughly examine how the US’s UMP impacts developing and frontier markets like Vietnam in the GFC and COVID-19 Periods 1.2 RESEARCH OBJECTIVES First, this study examines how the Vietnamese financial market reacts to the US’s UMP announcements during the GFC and the COVID-19 pandemic Second, this research scrutinizes the response of Vietnam’s real economy to the shocks of the US’s UMP during the GFC and the COVID- 19 pandemic Third, this research delves into the exploration of potential disparities in the international spillover effects of the US’s UMP on Vietnam’s financial market and real economy during two distinct periods of crisis: the GFC and the COVID-19 pandemic 2 1.3 RESEARCH QUESTIONS Question 1: Does the Vietnamese financial market react to the US’s UMP announcements in the global financial crisis and the COVID-19 pandemic period? Question 2: Does the real economy of Vietnam respond to the US’s UMP shocks in the global financial crisis and the COVID-19 pandemic period? Question 3: Do differences exist in the effects of the US’s UMP on the Vietnamese financial market and real economy between the global financial crisis and the pandemic crisis? 1.4 THE SCOPE OF THIS STUDY First, this study focuses explicitly on UMP tools implemented by the United States Second, this research will investigate the period from 2007 to 2022 Third, this study will mainly examine the immediate response of the stock market in Vietnam Finally, this study will examine the response of the real economy in Vietnam, which is a proxy for price index and output 1.5 RESEARCH METHODOLOGIES AND DATA This research employs the event study (ESM) method to analyze the effects of the US’s UMP announcement on the Vietnam stock market The structural vector autoregression (SVAR) model is used to study the effects of the US’s UMP shocks on Vietnam's real economy Data used in this study includes proxies for the US’s UMP and international transmission channels and the Vietnamese financial market and macroeconomic data spanning 2007 to 2022 1.6 RESEARCH CONTRIBUTIONS First, this study investigates the impact of the US’s UMP on a frontier market like Vietnam Second, the study uses a variety of proxies for the US’s UMP Third, this study also compares the likely differences between the effects of the US’s UMP in the GFC and during the pandemic crisis Finaly, the study also finds that the risk-taking and portfolio rebalancing channel are essential for the spillover effects of the US’s UMP 1.7 THE STRUCTURE OF THE STUDY Chapter 1: Introduction 3 Chapter 2: Literature review Chapter 3: Research methodology and data Chapter 4: Research results Chapter 5: Conclusions and policy implications 4 2 CHAPTER 2: LITERATURE REVIEW 2.1 CONCEPTUAL FRAMEWORK 2.1.1 Conventional monetary policy 2.1.1.1 Definition Monetary policy is a macroeconomic management policy in which the Central Bank uses tools that affect operational objectives, modifying the money supply and interest rates, hence influencing monetary policy's ultimate purpose, which is price stability, economic growth, and employment 2.1.1.2 Conventional monetary policy tools a Open market operations b Discount lending c Reserve requirements 2.1.1.3 Transmission mechanism of conventional monetary policy a Interest rate channel b Exchange rate channel c Asset price channel d Credit channel 2.1.2 Unconventional monetary policy 2.1.2.1 Definition UMP policies “directly target the cost and availability of external finance for banks, households, and non-financial companies.” 2.1.2.2 Unconventional monetary policy tools a Expansion of lender of last resort facilities or liquidity provision b Forward guidance c Asset purchases or quantitative easing d Negative interest rates 2.1.2.3 Transmission mechanism of unconventional monetary policy a The signaling channel b The portfolio rebalancing channel c Liquidity channel d Bank lending channel e Confidence channel 5 2.1.2.4 International transmission of unconventional monetary policy UMP can impact international capital flows For example, low-interest rates in one nation may entice investors to seek greater yields elsewhere, prompting capital to flow out of the country This may impact the relative prices of stocks, bonds, homes, and land, leading to international capital flows (wealth channel), GDP growth, and inflation 2.1.2.5 The differences between CMP and UMP CMP is well understood and predictable since it is based on interest rate changes In contrast, UMP is based on non-interest rate approaches, is typically more complex and unpredictable, and is employed only in exceptional circumstances or when CMP tools are insufficient UMPs seek to handle economic difficulties and are distinguished by their responsiveness to unique circumstances 2.1.3 Financial market and real economy 2.1.3.1 Financial market 2.1.3.2 Real economy 2.2 THEORETICAL FOUNDATIONS OF THE STUDY 2.2.1 The Efficient Market Hypothesis 2.2.2 Taylor rule 2.2.3 Asset pricing by discounted cash flow 2.2.4 Milton Friedman's money demand theory 2.2.5 Tobin’s q theory 2.2.6 The Mundell-Fleming-Dornbusch model 2.2.6.1 IS – LM model 2.2.6.2 Mundell-Fleming-Dornbusch model 2.3 LITERATURE REVIEW 2.3.1 The effects of unconventional monetary policy UMP is examined from various points of view and methods in financial contexts They only focus on the effects of these policies on several aspects of the economy In general, the literature can be divided into three different strands: (i) the effects of the unconventional monetary policy on themselves, (ii) the international spillover effects of the unconventional monetary policy on others, and (iii) the research on UMP during crises, especially during pandemic crisis cause by COVID-19 6 Firstly, regarding the impact of UMP, numerous studies concentrate on its effects within representative developed countries, such as the United States, the United Kingdom, Japan, and the Euro Area These studies primarily explore the consequences of UMP within these countries themselves They can be divided into three strands: (i) Studies on the impact of UMP during the GFC on the United States (ii) studies focusing on assessing the effects of UMP on developed countries or areas using UMP, like England, Japan, and ECB (iii) study the impact of UMP on a group of countries simultaneously; these studies often focus on a group of countries, including the US, UK, Japan, and EU region, to find out the different effects of UMP on these countries Most of the studies currently focus on the influence of these policies on financial markets and real economies, separately or both of them simultaneously The empirical results of the studies discussed indicated that firstly, the implementation of UMP in AEs leads to an increase in the total assets of Central Banks, resulting in a rise in output and price level, and those effects are powerful for economic activities; secondly, the financial markets are affected significantly by the UMP shocks, proved by the raising of stock price, lowering long-term government bond yields and the depreciation of the local exchange rate The second strand of this research topic is the international spillover effects of AEs’ UMP on the rest of the world, focusing on developing countries or emerging market economies (EMEs) Several empirical studies have been conducted to explore the economic reaction to the UMP shock in Aes Besides examining the impact of UMP on EMEs, many studies focus on developing countries or regions such as Latin America, Asia, Gulf countries, and BRICS The studies mainly concentrated on financial markets and the real economy in these nations, and these findings show that the expansion of AEs' UMP had a considerable influence on the rest of the world, particularly EMEs They showed evidence of international spillovers UMP can lead to a growth in portfolio flows accompanied by an increase in real production and various movements in financial variables, such as reduced bond rates, an increase in the stock market, or the appreciation of 7 the local exchange rate However, not all research provides the same results The other consideration in this field is analyzing the effect of UMP in a more specific scope is focused on the Asia and Pacific region, but several studies are quietly limited; they paid less attention to this area despite Asia being one of the markets that have a crucial role for international investors and industrialized countries However, most of the papers highlighted worries about the GFC while overlooking that a pandemic crisis created by COVID-19 is presently in place Indeed, they paid little attention to examining the different effects of the US's UMP on other countries during two different crises, the GFC period and the pandemic crisis, even though COVID-19 is one of the most critical factors influencing monetary policy in AEs and the greatest threat to the global economy Besides, several papers explore how UMP in AEs affect EMEs or developing countries over the world or among OECD economies or group countries in Asia; they have just really concentrated on EMEs when it comes to international spillover effects of AEs’s UMP, what they failed to overlook the fact that beyond EMEs, other regions also need to be studied as well Yet, there is little about the cross-border impact on the real economy and financial markets of UMP to frontier markets, and few papers explore this area in Asia However, they are also instrumental in transmitting capital flows related to international investors among these countries Vietnam's stock portfolio in the marginal market portfolio accounts for the largest share; in addition, Vietnam's level of globalization integration is increasing Therefore, the financial market and the Vietnamese economy will be affected by significant changes in the monetary policy of developed countries, especially the United States This study also adds to the literature on the international effects of the US’s UMP on open, small, and frontier markets both in the GFC and COVID-19 pandemic crisis period 2.3.2 The methodologies review 2.3.2.1 Event study methodology ESM used in these studies varied However, it is all based on identifying unusual fluctuations around events related to the use of UMP tools, such 8 as the announcement of LASP, Forward guidance, and sometimes the statement of the head of the Fed Studies using ESM to examine the effects of UMP focus on two groups: the effects on the financial market of those countries themselves and the effects on the rest of the world This method focuses on factors in financial markets such as the exchange rate between the USD and other currencies, the change in the yield of different types of bonds (government, corporate, and foreign bonds with various maturities), or the difference in interest rates between bonds of other maturities, and the rate of return of a stock index or individual stocks Event study dominates as a relatively effective method, mainly when they have concentrated on the effect of UMP on AEs themselves and on financial markets, which have quick and robust responses with the adjustment of monetary policy 2.3.2.1 Vector autoregressive model approach VAR models are the most widely used approach for studying the consequences of traditional monetary policy The literature is unanimous on the impact of monetary policy on output or inflation In other words, VAR-based models assess impacts on lower frequency variables such as output and inflation, which are often of primary concern to central banks However, SVAR has been used in various research to study the international spillover effects of UMP on the rest of the world Despite the excellent merit of the SVAR model and its improvement rather than VAR, some studies extended the traditional VAR framework and SVAR, which seem more practical Many researchers suggest using VAR and SVAR among these models to evaluate the effects of the unconventional monetary policy of the US However, SVAR seems helpful in investigating the international spillover effects from AEs to the rest of the world, especially in certain areas and regions in emerging group countries or developing economies 2.3.3 Research gap identification First, researchers pay little attention to frontier markets, although they also have a vital role in the investments of international investors 9 Second, most studies focus on the GFC and examine the impact of UMP during this period without considering or paying little attention to the epidemic crisis occurring on a large scale worldwide since 2020 Third, this research could help us better understand the cross-border spillovers, particularly the two competing views on the cross-border impact of the US’s UMP to Vietnam Finally, the study compares the differences in the effects of US UMP on Vietnam during the GFC and the recent COVID-19 pandemic These contributions are both substantial and practically significant for the research field 14 4.2.1.2 Average Cumulative Abnormal Return of the Market Figure 4.9 shows that For both periods, as AAR, the CAAR of the event windows tends to be like the period of the COVID-19 pandemic This indicates that the results of the COVID-19 pandemic period greatly influence the overall CAAR results for both periods 4.2.2 The reaction of different sectors to the US’s UMP announcement 4.2.2.1 Abnormal average return of different sectors In the GFC period, the results indicate that all 10/10 sectors show positive AAR on the event day The AAR result is statistically significant in three sectors: energy, consumer staples, and industry; the positive AAR ranges from 0.02% (Finance) to 0.36% (Energy) After the event day, positive AAR is only sustained in 2/10 sectors; however, on the second day (+2), AAR turns positive again for 9/10 sectors In the COVID-19 period, the results indicate that 9 / 10 sectors exhibit a positive ARR on the day when information related to the US's UMP during the COVID-19 pandemic is announced The AAR on the event date ranges from -0.16% to 0.38% The financial, energy, and industrial sectors have positive AAR and the highest prices, whereas only the information technology sector has a negative AAR Additionally, the AAR is statistically significant at the 1% level for the financial and industrial sectors 15 4.2.2.2 Average cumulative abnormal return of different sectors Source: Source: calculated from research data The CAAR for five days before and five days after the event ([-5;+5]) is an appropriate timeframe to examine the impact of US’S UMP information on different sectors The results regarding the market's reaction to the US’s UMP announcements in the two crisis periods have provided additional insights into answering research question 3 and have proved research hypothesis 1 4.2.3 Robustness test The study will employ the market-adjusted model instead of the market model to assess abnormal returns The CAAR results for sectors in both periods show a similar trend to the CAAR determined by the risk-adjusted and market models The CAAR results consistently maintain positive accumulation, gradually increasing in the days following the event date However, the Information Technology sector exhibits a distinct trend, with its CAAR decreasing in both periods after the event date These results are statistically significant at the 1%, 5%, 16 and 10% levels based on parameter testing (Pattel Test) and non-parametric testing (Generalized Rank Test) 4.2.4 Discussing research results 4.2.4.1 Similarities between the two periods On the event date, the AAR of the market was positive and statistically significant in both study periods, which confirms that the Vietnamese stock market has reacted to information about the US’s UMP policy Thus, we can see the market's efficiency and the impact of the US monetary policy on the Vietnamese market The post-event windows [0;+1] and [0;+2] still maintain positive CAARs even though these post-event date AARs for many sectors are negative, which once confirmed the positive market reaction on the day of the event Health care, energy, industrials, material, and consumer staples sectors had similar reactions when maintaining CAAR before and after the event date 4.2.4.2 Differences between the two periods During the GFC period, before the event, the AAR of many sectors was negative; specifically, on -1, there were 6/10 sectors, while on -2, 10/10 sectors were negative However, in COVID-19, a few sectors had negative AAR before the event date, precisely one day before the event date There were 3/10 sectors, while two days before the event date, it was 2/10 The Real Estate, industrials, materials, and finance sectors during the COVID-19 pandemic had a much more positive response than during the GFC period; stocks in these sectors maintained positive AAR and CAAR and high statistical significance The financial and real estate sectors during the COVID-19 pandemic showed much better AAR and CAAR trends than they did during the financial crisis period However, the information technology sector exhibited contrasting CAAR trends between the GFC and COVID-19 periods 17 4.3 RESEARCH RESULTS FROM SVAR 4.3.1 Correlation between variables 4.3.2 Data statistical description 4.3.3 Unit root test results 4.3.4 The optimal lag-length selection results Lag criteria show that lag 11 is suitable for SVAR, proposed by LR, FPE, and AIC criteria Therefore, the optimal lag length for the selected model is 11 4.3.5 SVAR model results 4.3.5.1 Impulse Response Results ❖ Responses of GDP and CPI to UMP shock and transmission channels A shock to the total assets of the Fed balance sheet significantly boosts Vietnam's output and price index However, only the reaction to GDP is meaningful for the ninth month More precisely, an increase in CBB causes a positive and statistically significant increase in GDP in the ninth month following the shock, peaking after roughly ten months at an increase of 4.2 percentage points The reaction of CPI to a shock of US UMP is similar to the response of GDP when a positive shock to US UMP leads to a steady upward effect on the CPI of Vietnam in the short term, peaks at a 0.3 pp rise, and lasts for around one year However, this response is not statistically significant 18 The VIX index considerably influences Vietnam's GDP and CPI (Figure 4.22) The findings reveal an adverse reaction of GDP and CPI to a VIX shock Foreign portfolio flow has a comparable impact on Vietnam's GDP and CPI as the CBB shock The spike in inflow capital has resulted in a significant boost in Vietnam's market returns The initial response of stock prices in Vietnam has been notably favorable for four months, hitting a peak after four months with an increase of 2.6 percentage points ❖ Responses of GDP and CPI to domestic shocks 19 Although not statistically significant, the results show an upward effect on GDP and CPI after the SP shock Figure 4.26 shows that only the response of CPI to FOREX shock is statistically significant More specifically, a depreciation of the exchange rate leads to a persistent increase in the price index The expansion of the US monetary policy led to a decrease in interest rates