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Monetary policy is the process by which the monetary authority of a country controls the supply of money, often targeting a rate of interest for the purpose of promoting economic growth and stability. The official goals usually include relatively stable prices and low unemployment. Monetary economics provides insight into how to craft optimal monetary policy.Monetary policy is referred to as either being expansionary or contractionary, where an expansionary policy increases the total supply of money in the economy more rapidly than usual, and contractionary policy expands the money supply more slowly than usual or even shrinks it. Expansionary policy is traditionally used to try to combat unemployment in a recession by lowering interest rates in the hope that easy credit will entice businesses into expanding. Contractionary policy is intended to slow inflation in order to avoid the resulting distortions and deterioration of asset values.
Monetary Policy & Inflation Control in Vietnam Macroeconomics Presentation Content I Overview Monetary Policy of VN Inflation of VN II Tools of State Bank of Vietnam III How Vietnam used Monetary Policy to control Inflation I Overview Monetary policy of Viet Nam 1.1 Legal framework: Based on the SBV Law, monetary policy is largely the responsibility of the National Assembly and the government, and the SBV is an integrated part of Vietnamese government The National Assembly, together with the government, sets monetary policy objectives and the stance of monetary policy Monetary policy of Viet Nam 1.2 Goal: Resolution 11(24/2/2011): control inflation, stabilized macroeconomic with packages of policy Tightening monetary policy Constraint trade deficit Increased electricity prices Use provide a mechanism for the market over the pricing of gasoline Strengthen social security Improve the efficiency of information dissemination policy In 2012, the State Bank have the appropriate policies to encourage credit institutions to provide preferential loans in this area Central bank monetary policy operating closely and carefully to achieve the objective of controlling credit growth, the total liquidity low payment, interest rate and exchange rate at reasonable levels contribute to curb inflation, stabilize macroeconomy and ensure social security Inflation – Figure and fact Inflation rate in some recent years Year 2007: 12.63% Year 2008: 19.89% (when the global financial crisis started) Year 2009: 6.52% Year 2010: 11.75% Year 2011: 18.58% Inflation – Figure and fact Inf lation rate 25 20 15 Inflation rate 10 2007 2008 2009 2010 2011 Inflation – Figure and fact CPI in some recent years Year 2006: 6.6% Year 2007: 12.63% Year 2008: 22.97% (when the global financial crisis started) Year 2009: 6.8% Year 2010: 11.75% Year 2011: 18.12% The inflation rate in Vietnam was last reported at 14 percent in March of 2012 II MP instruments A_ Indirect monetary policy Reserve requirements Lending facilities Open market operations B_Direct instruments Reference rates to influence interest rates Administrative instruments R=Real exchange rate R=Real exchange rate (RER (RER Discount rate Discount rate • Real exchange rate Reserve requirement Reserve requirement • Discount rate Open market operation Open market operation • Reserve requirement Indirect instruments • Open market operation Required reserves The SBV has been using required reserves in various forms since the 1990s, and changes of reserve requirements for deposits have been considered as an important instrument of monetary policy in the past Reserve requirements are differentiated according to the maturity of deposits, the sectoral focus of banks, and whether it is a domestic or foreign currency deposit Reserve requirements for deposits of less than a year are higher than those for deposits of more than a year, and lower for banks that are active in the agricultural sector and for People’s Credit Funds Lending facilities Refinancing rate ( the upper interest rate ) 13% (11/04/2012) 693/QD-NHNN 10/4/2012 Discount rate (the lower rate ) 11% (11/04/2012) 693/QD-NHNN 10/4/2012 Open market operation Open market operations take the form of outright sales and purchases of securities or repurchase agreements The purchase or sale of securities may take place in the form of auctions by volume or auction for interest rate Securities eligible for open market transactions are primarily government securities, State Bank bills or securities that have been selected by the SBV Currently, auctions take place three times a week, and in 2004 the SBV launched a web-based auction system Interventions in the foreign exchange market 1 USD =20,828.00 VND Document No138/TB-NHNN Date of issuing14/05/2012 “The real exchange rate, used in conjunction with appropriate commercial and industrial policies can serve as a development tool in coordination with other monetary policy instruments to strengthen the economy’s overall competitiveness, increase aggregate productivity, maintain external balance, contain inflation and stabilize asset markets” (Frenkel and Taylor 2005) Evaluation: While indirect monetary policy has been introduced, there appears to exist a strong belief in the government and the State Bank of Vietnam that indirect monetary policy instruments are not sufficient to control inflation and that other measures than indirect monetary policy need to be used Direct measurements 1)Reference rate for interest rates of banks: 1.1 Base interest rate has been to provide a “basis for the determination by credit institutions of the lending interest rate in Vietnam dong” 9% 01/12/2010 8% 01/11/2010 1.2 Ceiling on interest rates that banks pay on dollar deposits of corporate clients 2) Administrative instruments III How Vietnam used Monetary Policy to control Inflation OMO Use RRR Control State Bank of Vietnam Inflation Discount rate … 19 On 17/5/2011, SBV rose OMO Interest rate from 13% to 15% per year On 1/6/2011, Reserve requirement ratio for commercial banks (except Agribank) increased from 6% to 7% On 3/8/2011, SBV increased Discount rate from 7% to 12%, then increased to 13% on 1/5/2011 20 Increase in OMO Interest rate and Discount rate by SBV Limit the access to capital of commercial banks Decrease money supply 21 Increase in Reserve requirement ratio by SBV Decrease money for loans in commercial banks Decrease money supply 22 MS Deceases Interest Rate Increases C&I decreases AD decreases Real GDP decreases 23 References Quan-Hoang Vuong and Pham Minh Chinh Kinh te Viet Nam - Thang tram va dot pha (Eng: Vietnam’s economy - The rises, falls and shifts), (in Vietnamese), National Political Publisher, Hanoi, 2009 James Riedel and Suiwah Leung “The role of the State in Vietnams eco- nomic transition,” Working Paper 01-1, Asia Pacific School of Economics and Government the Australian National University, 2001 James Riedel and William S Turley “The politics and economics of tran- sition to an open market economy in Vietnam,” OECD Working Paper No 152, September 1999 Central Bank News, 2011 Monetary Policy Week in Review – 21 May 2011 Available at: http://www.centralbanknews.info/2011/05/monetary-policy-week-in-review-21-may.html Accessed 13May 2012 Bao moi, 2012 Vietnam successful in implementing tight monetary policy Available at: http://en.baomoi.com/Info/Vietnam-successful-in-implementing-tight-monetary-policy/5/261459.epi Accessed 13 May 2012 Dan tri, 2011 Ngan hang nha nuoc se lam gi nam 2012 Available at: http://dantri.com.vn/c76/s76-559026/ngan-hang-nha-nuoc-se-lam-gi-trong-nam-2012.htm Accessed 14 May 2012 Dan tri, 2011 Lai suat thi truong mo len 15% nam Available at: http://dantri.com.vn/c76/s76-481970/tang-lai-suat-thi-truong-mo-len-15nam.htm Accessed 14 May 2012 Vietnam Economy, 2011 Tiep tuc tang ty le du tru bat buoc bang ngoai te Available at: http://vneconomy.vn/2011060111395221P0C6/tiep-tuc-tang-ty-le-du-tru-bat-buoc-bang-ngoai-te.htm Accessed 14 May 2012 Vietnam Economy, 2011 lan khung hoang va lan chuyen vi the cua Viet Nam Available at: http://vneconomy.vn/20105194034740P0C9920/3-lan-khung-hoang-va-3-lan-chuyen-vi-the-cua-viet-nam.htm Accessed 14 May 2012 Bao moi, 2008 Nhap sieu nam 2008 la 17 ty USD Available at: http://www.baomoi.com/Nhap-sieu-nam-2008-la-17-ty-USD/50/3061585.epi Accessed 13 May 2012 24 ... belief in the government and the State Bank of Vietnam that indirect monetary policy instruments are not sufficient to control inflation and that other measures than indirect monetary policy. ..Content I Overview Monetary Policy of VN Inflation of VN II Tools of State Bank of Vietnam III How Vietnam used Monetary Policy to control Inflation I Overview Monetary policy of Viet Nam 1.1... competitiveness, increase aggregate productivity, maintain external balance, contain inflation and stabilize asset markets” (Frenkel and Taylor 2005) Evaluation: While indirect monetary policy has been introduced,