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

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

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

Chapter 2: Literature review

Chapter 3: Research methodology and data Chapter 4: Research results

Chapter 5: Conclusions and policy implications

2 CHAPTER 2: LITERATURE REVIEW

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

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

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

2.3.1 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

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

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

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

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

3 CHAPTER 3: RESEARCH METHODOLOGY AND DATA 3.1 RESEARCH METHODOLOGY

3.1.1 Event study method

3.1.1.1 Introduction to event study method

3.1.1.2 The steps of event study methodod

Step 1: Identify the research event

Fed announcements related to the use, expansion, or extended use of UMP tools in the GFC period and the COVID-19 pandemic period

Step 2: Determine the length of time for the event windows

This research will choose a maximum event window of 11 days, encompassing five days before and five days after the event date

Step 3: Determine AR and CAR (AAR and CAAR)

Determine expected return (E(𝑅𝑖,𝑡)

❖ The mean-adjusted model

❖ The market-adjusted model

❖ The market and risk-adjusted model or the market model Determine abnormal return and accumulated abnormal return

AR𝑖,𝑡 ≡ 𝜀𝑖,𝑡= 𝑅𝑖,𝑡− E(𝑅𝑖,𝑡) 𝐶𝐴𝑅𝑖(𝑡1, 𝑡1) = ∑𝑡1 AR𝑖,𝑡

𝑡=𝑡1 AA𝑅𝑡 = 1

𝑖=1 AA𝑅(𝑡1,𝑡2)=𝑁1∑ ∑𝑡 AR𝑖,𝑡

3.1.2 Structural vector autoregressive model

3.1.2.1 Introduction to Structural Vector Autoregressive Model

3.1.2.2 Research procedures

Step 1: Building a research model

Step 2: Check the unit root for the data series

Step 3: The optimal lag-length selection for the SVAR model

Step 4: Estimating a reduced VAR model with optimal lag-length Step 5: Diagnostic testing of the VAR model

Step 6: Estimate the SVAR from the just estimated VAR result

Step 7: Analyzing the impulse response function (IRF) and the Forecast Error Variance Decomposition

Step 8: Estimate the SVAR with two periods separately

Step 9: Analyzing the impulse response function (IRF) and the Forecast Error Variance Decomposition in two phases

3.1.2.3 Proposed research model

SVAR model is used in this study to examine the effects of US UMP shocks on Vietnam's real economy based on the approach (Carrera & Ramírez-Rondán, 2020; Cushman & Zha, 1997; Li, İşcan, & Xu, 2010; Yildirim & Ivrendi, 2021)

The vector of endogenous variables is as follows:

𝑌𝑡 = (𝑈𝑀𝑃𝑡, 𝑉𝐼𝑋𝑡, 𝐶𝐹𝑡, 𝑆𝑃𝑡, 𝐼𝑅𝑅𝑡, 𝐹𝑂𝑅𝐸𝑋𝑡, 𝐺𝐷𝑃𝑡, 𝐶𝑃𝐼𝑡)

In which UMP (a proxy for the United States unconventional monetary policy), VIX (the VIX index), CF (capital inflows to Vietnam), SP (stock price), IRR (interest rate), FOREX (exchange rate), GDP (gross domestic

product), and CPI (inflation)

3.1.2.4 Research variables

a Proxy variable for the US’s unconventional monetary policy

b Proxy variables for the transmission channel

c Proxy variables for domestic macroeconomic factors

d Proxy variables for the real economy

3.2 RESEARCH DATA

3.2.1 Data for ESM

(i) Event dates related to the US’s UMP announcements during the global financial crisis and the COVID-19 pandemic These data are collected directly from the Fed's website and research by (Bowman, Londono, & Sapriza, 2015) and (Clarida, Duygan-Bump, & Scotti, 2021) (ii) Data on adjusted stock prices, VNindex These data are collected from the Ho Chi Minh City Stock Exchange (HOSE)

3.2.2 Data For SVAR

The data span from January 2007 to April 2022, including total assets Fed’s balance sheets (UMP), VIX index (VIX), foreign portfolio investment flows to Vietnam (CF), Vietnam’s stock price (SP), the market interest rate in Vietnam (IRR), the nominal exchange rate of USD/VND

(FOREX), Vietnam output (GDP), and Vietnam inflation (CPI) All data are collected primarily from IMF and HOSE It is compiled from the VIX index in the Chicago Board Options Exchange (CBOE) and the Fed’s balance sheet in the Federal Reserve Bank

3.3 RESEARCH HYPOTHESES

Hypothesis 1: Vietnamese financial market responses positively to

announcements related to the US's UMP in the global financial crisis and the COVID-19 pandemic period

Hypothesis 1.1: The Vietnamese stock market responses positively to

announcements related to the US's UMP in the global financial crisis and the COVID-19 pandemic period

Hypothesis 1.2: The different sectors reacted positively to announcements

related to the US's UMP in the global financial crisis and the COVID-19 pandemic period

Hypothesis 2: The US’s UMP positively affects the real economy of

Vietnam in the global financial crisis and the COVID-19 pandemic period

Hypothesis 3: There are differences in the reaction of Vietnamese financial

market and real economy related to the US’s UMP during the GFC and COVID-19 pandemic

Hypothesis 3.1: There are differences in the reaction of the Vietnamese

stock market to announcements related to the US’s UMP during the GFC and COVID-19 pandemic

Hypothesis 3.2: There are differences between sectors with

announcements related to the US’s UMP during the GFC and the

COVID-19 pandemic periods

Hypothesis 3.3: Vietnam’s real economy responds more strongly to the

shock of the US’s UMP during COVID-19 than the previous global financial crisis

4 CHAPTER 4: RESEARCH RESULTS

4.1 OVERVIEW OF THE FINANCIAL MARKET AND ECONOMY IN VIETNAM FROM 2000 TO 2022

4.1.1 Overview of the financial market in vietnam from 2000 to 2022

4.1.1.1 Market size during the period from 2000 to 2022

4.1.1.2 Fluctuations in the stock market during the period from 2000 to

2022

4.1.2 Overview of Vietnamese economy from 2000 to 2022

4.1.2.1 Economic growth of Vietnam from 2000 to 2022

4.1.2.2 Inflation in Vietnam during the period from 2000 to 2022

4.2 RESEARCH RESULTS FROM ESM

4.2.1 The reaction of the market to the US’s UMP announcement

4.2.1.1 Abnormal average return of the market

The results of Table 4.1 show that the Vietnamese stock market had a

positive response for all observations of the US’s UMP event in both periods, as shown in the AAR around the event date Specifically, the days before the event date from -5 to -1, the market appeared AAR fluctuated around -0.16% to 0.24%