Chính sách tiền tệ lạm phát mục tiêu và khả năng áp dụng ở Việt Nam ttta

MINISTRY OF TRAINING AND EDUCATION THE STATE BANK OF VIETNAM BANKING UNIVERSITY OF HO CHI MINH CITY oo0oo NGUYEN THI MY HANH INFLATION TARGETING STRATEGY AND ITS APPLICABILITY IN VIETNAM SUMMARY OF DOCTORAL THESIS MAJOR: FINANCE – BANKING CODE: 9.34.02.01 SUPERVISOR: ASSOC.PROF.DR LE THI MAN HO CHI MINH CITY – 2019 SUMMARY For a long time, the State Bank of Vietnam has chosen inflation targeting as its main monetary policy framework However, so far, the transition to the inflation targeting mechanism is still a big challenge for the central bank of Vietnam In this thesis, the author will provide empirical evidences to show that the bottleneck in conducting inflation targeting monetary policy in Vietnam is ineffectiveness of using interest rate tool The central bank has the right to choose monetary policy instruments, but an important condition for the central bank to succeed in applying the inflation targeting mechanism is that there must exist a relationship between monetary policy instruments and inflation In this thesis, the author will examine the relationship between the interest rate tool (the main monetary policy tool often used when the central bank applies target inflation policy) and inflation In addition, the thesis will determine whether the State bank of Vietnam use interest rate instruments towards stabilizing inflation or exchange rate The author has set up a vector regression model of variables: inflation, interest rate, exchange rate, domestic aggregate demand and foreign aggregate demand The model is essentially a reflection of the monetary policy transmission mechanism of the interest rate tool There are many different types of interest rates, however, the interest rate that represents the central bank's interest rate tool is policy rates In Vietnam, there are two types of policy interest rates: refinancing rate and interest rate Research results from the thesis show that operating the interest rate instruments including refinancing rate and discount rate to control inflation in Vietnam is not really effective because the relationship between inflation and interest rate instruments is very weak In addition, the research results show that the policy interest rate tool in Vietnam has a great impact on exchange rates This suggests that it is possible that in the past, Vietnam has used interest rate tools to protect the exchange rate rather than to stabilize prices This also means that Vietnam has not yet satisfied the two basic conditions to be met before applying the inflation targeting monetary policy set by the International Monetary Fund CHAPTER INTRODUCTION 1.1.The necessity of the thesis In a survey of the IMF's International Monetary Fund for 88 non-industrial countries, more than half of these countries expressed their desire to move to inflation targeting framework and Vietnam is also included in the group of potential countries that can apply inflation targeting (Batini and Laxton, 2006) The State Bank of Vietnam’s intention of moving to inflation targeting is clearly reflected in the development plan of Vietnam's banking industry to 2010 and development orientation to 2020 in Decision No 112/2006 / QD-TTg dated 24/5/2006 of the Prime Minister: “Implementing monetary policy based on the regulation of money amount; at the same time, building necessary conditions to gradually move to the implementation of monetary policy on the basis of interest rate regulation To create necessary conditions for after 2010, the State Bank of Vietnam will move to inflation targeting framework” After 2010, nearly three-quarters (3/4) of the countries assessed by the IMF as potential countries to move to inflation targeting mechanism have fulfilled their wishes Meanwhile, the year of 2020 is coming but Vietnam is still on the way towards inflation targeting policy Perhaps there are many difficult issues that the State Bank of Vietnam has not yet solved to move towards the transition to inflation targeting mechanism According to the IMF research team, there are two basic conditions that a country needs to satisfy when applying the inflation targeting mechanism (Debelle et al., 2018) The first condition is that the central bank is independent in conducting monetary policy It is not necessary that the central bank is completely independent of the Government in conducting monetary policy The central bank only needs to be independent in selecting tools to run monetary policy towards controlling inflation In addition, the management of monetary policy of the central bank must be independent of fiscal policy In other words, the central bank must not allow fiscal dominance, which means that the central bank cannot fund the government budget deficit because it can lead to to increase inflation and reduce the effectiveness of monetary policy Moreover, not letting fiscal policy dominate monetary policy means central bank does not print money to generate revenue for the budget To this, the central bank needs to have revenues independent of the state budget The second condition for the central bank to be satisfied to apply the inflation targeting framework is that the central bank prioritizes focusing on the most important goal of controlling inflation, instead of focusing on many other goals such as exchange rate stability, economic growth, employment rates The two basic conditions mentioned above seem simple but why so far Vietnam has not been able to apply the inflation targeting policy? Regarding the first condition, there have been empirical studies proving that Vietnam does not allow the phenomenon of financial repression because the budget deficit in Vietnam is not the cause of inflation (Nguyen & Nguyen, 2010; Hoang, 2014) Therefore, it is likely that the problem that Vietnam is facing is the independence of monetary policy tool to achieve inflation control target Specifically, Debelle (2001) analyzes the common obstacles facing emerging economies when applying inflation targeting mechanisms in these countries, the relationship between monetary policy instruments and inflation is often unclear If central banks have adopted the inflation targeting mechanism, which often uses the indirect tool of interest rates to conduct monetary policy, central banks in many developing countries still use direct tools followed by issuing administrative orders serving monetary policy management such as credit limit, deposit rate ceilings In order to make it clearer about the independence of monetary policy instruments in Vietnam, in this study, the author will focus on analyzing the relationship between interest rate tools in Vietnam and inflation to see whether this tool is really effective in controlling inflation like the countries that apply inflation targeting Besides, the thesis also considers whether Vietnam satisfies the second condition or not? According to the Vietnam 2035 overview report (World Bank, 2016), the State Bank of Vietnam has too many goals in conducting monetary policy, while many central banks in the world are allowed to assign pricing tasks and report implementation results to the government Since 2012, inflation in Vietnam has always been controlled at a single-digit level; however, due to the lack of commitment of the State Bank on price stability in the long term, the expectation of price increases always exist and affect the sustainable development of Vietnam's economy Therefore, the World Bank team has proposed that Vietnam should choose only one main goal of monetary policy: stablize exchange rate or focus on inflation targeting In the Banking Sector Development Strategy from 2025 to 2030, the Prime Minister's Decision No 986 / QD-TTg of August 8, 2018, clearly affirms that the objective of controlling inflation is priority For a developing country like Vietnam, exchange rate stability is still an important issue to consider before Vietnam the inflation targeting framework since scientific research has proven that exchange rate is an important factor affecting inflation in Vietnam (Nguyen & Nguyen, 2010) Will the floating exchange rate regime as managed in Vietnam last time affect the target of inflation control of monetary policy? In this thesis, the author will examine whether exchange rate stablity or price stability is the priority of Vietnamese monetary policy There are many studies on adopting inflation targeting monetary policy in Vietnam such as studies by To Kim Ngoc (2012), To Kim Ngoc and Nguyen Khuong Duy (2012), Ly Ba Hong Son and Nguyen Van Truong (2012), Nguyen Xuan Hung (2008), Nguyen Xuan Hung (2009), Nguyen Phuc Canh (2013), Nguyen Thanh Nhan (2010), Do Thi Duc Minh (2003), Nguyen Ngoc Thach (2013), To Kim Ngoc and Le Tuan Nghia (2012) However, these studies have not yet analyzed in depth the independence of monetary policy instruments in Vietnam nor assessed the role of exchange rate in transition to inflation mechanism in Vietnam Hence, in order to further clarify Vietnam's satisfaction with the necessary conditions to apply the inflation targeting policy by quantitative method, the author chooses the topic "Inflation targeting strategy and its applicability in Vietnam” Empirical results from this thesis will also be the scientific evidences to make necessary recommendations for Vietnam so that the country could apply the inflation targeting framework in the future 1.2 Objectives of the study The first research objective: The central bank has the right to choose monetary policy instruments but the important condition for the central bank to succeed in applying inflation targeting framework is that the relationship must exist between monetary policy instruments and inflation Therefore, the author will examine the relationship between monetary policy instruments (particularly the interest rate tool - the tool often used when the central bank applies inflation targeting monetary policy) and inflation The second research objective: The thesis will determine whether the priority goal of the State Bank of Vietnam in the conduct of monetary policy is to stabilize inflation or stabilize exchange rate 1.3 Research question The research question is based on two research objectives of the thesis as follows: The first research question: Is there a relationship between policy rates and inflation in Vietnam? The second research question: Is the current setting of interest rate instruments in Vietnam geared towards controlling inflation or stabilizing exchange rates? 1.3 Research Method The thesis uses both quantitative and qualitative research methods To answer the two research questions, the author has set up a vector regression model including variables: inflation, interest rate, exchange rate, Vietnam industrial production index and United States industrial production index The model is a reflection of the monetary policy transmission mechanism of the interest rate tool There are many different types of interest rates, however, the interest rate that represents the central bank's interest rate tool is policy interest rates (interest rates that are determined by the central bank and published to provide a basis for various types of interest rates in the market) In the context of Vietnam, the central bank decides and announces two types of policy interest rates: refinancing rate and discount rate Because there are types of interest rates acting as policy interest rates, the author built models to test the role of these interest rates Because the data series in the study all stopped at the first difference, the author applied the vector error correction model (VECM) in data analysis The analysis results from variance component analysis will show whether the interest rate instrument in Vietnam has a real impact on inflation or on exchange rate All data is processed by using STATA 14 Software In combination with qualitative analysis, the author will assess the consistency of quantitative research results with the current situation in Vietnam 1.4 Object and scope of the study The main research object of this thesis is monetary policy framework and policy interest rates in Vietnam The dissertation's research period starts from January 2011 This is the time to start applying the State Bank Law 2010 The data in the thesis is collected monthly from January 2011 to June 2018 1.5 The structure of the thesis The thesis is designed with chapters as follows: Chapter Introduction Chapter Literature review Chapter Model and research method Chapter Empirical results Chapter Conclusions and recommendations 1.6 Research contributions The study of inflation targeting is not a new research topic in Vietnam However, in the current period, the research results from this thesis have proved that the bottleneck in moving to inflation targeting in Vietnam is the interest rate tool Recently, the State Bank of Vietnam has well performed its duties in achieving goals and fulfilling tasks set by the Government and the National Assembly However, the State Bank of Vietnam still needs to improve and modernize the way of conducting monetary policy The empirical results from this thesis is helpful for policy makers in Vietnam when it provides evidences explaining why Vietnam could not apply inflation targeting at the moment as well as recommendations that would be useful for Vietnam in the future 1.7 New findings of the thesis There are many research projects on inflation targeting in Vietnam Compared to previous studies, this thesis found new findings: - The thesis provides empirical evidence that using interest rate tools towards controlling inflation in Vietnam is not really effective when the relationship between interest rate and inflation is very weak - The research results also show that policy rates in Vietnam have a great impact on exchange rates and the impact of interest rates on exchange rates is much larger than its impact on inflation It could be that Vietnam has used interest rate tools to protect the exchange rate in recent years, or in other words, Vietnam has violated the main conditions of applying inflation targeting monetary policy - This result shows that the level of transmission of the exchange rate into inflation is very small In other words, the explanation of the exchange rate on the change of inflation in this study is very small Therefore, Vietnam can continue with the current regime of floating exchange rate management, and at the same time, expand the fluctuation range of the exchange rate so that the country could apply the inflation targeting framework in the future CHAPTER LITERATURE REVIEW 2.1 Monetary policy 2.1.1 Concept Scientists offer different perspectives on monetary policy Mishkin (2011) argues that monetary policy is the process of managing money supply of the central bank towards an interest rate level to achieve the goals of monetary policy such as inflation control, exchange rate stabilization, full employment or economic growth In Vietnam, Nguyen Van Tien (2009) defines monetary policy as macroeconomic policy, through its tools, the central bank actively changes the supply of money or interest rates (inter-bank interest rates) to achieve its set socioeconomic goals According to Vietnam's State Bank Law 2010, the definition of monetary policy (monetary policy) is as follows: “National monetary policy is monetary decisions at the national level of competent state agencies, including the determination of the target of stabilizing the value of money expressed by the inflation target, the decision to use tools and measures to realize the set objectives ” 2.1.2 Monetary policy target system 2.1.2.1 The final goal Each country can set many goals for the economy such as high economic growth, full employment of inflation, low inflation, export growth Depending on the economic characteristics, each country will have its own monetary policy However, according to Mishkin and Eakins (2006), the ultimate goal of monetary policy is usually directed to the main goals: price stability, increase in employment, and economic growth In addition, monetary policy also aims to stabilize interest rates, stabilize exchange rates and stabilize financial markets 2.1.2.2 Intermediate target The impact of monetary policy on final goals usually takes a certain amount of time Policy latency can range from months to years Because of such a delay, the central bank needs to identify intermediate targets before reaching the final goal If you wait until the economy shows signs and then react, it will be too slow The criterion for choosing an intermediate target is observable and measurable, controllable, and is closely linked to the final goal According to that criterion, the targets often used as intermediate targets are total money supply (M1 or M2 or M3) or interest rates However, the central bank cannot choose both indicators as intermediate targets This means that the central bank can only choose one of the two criteria If the central bank chooses the money supply target, the target of interest rate removal must be removed or if the central bank chooses the interest rate target, the money supply control target must be removed 2.1.2.3 Operation target Intermediate targets may have a direct impact on the ultimate goals of monetary policy but cannot respond immediately when the central bank adjusts monetary policy instruments The operational objective is the variable that is directly affected by monetary policy instruments and signals the view of monetary policy (tightening or easing) The criteria for selecting the operational objectives are the same as the criteria for selecting the intermediate targets Only the criteria selected will be related to the intermediate target Therefore, the choice of activity target will also depend on whether the central bank chooses money supply or interest rates as an intermediate target With these criteria, the variables selected by the central bank as operational targets include two types: (1) reserves including base or intermediate banks, (2) interest rates such as interbank interest rates, treasury bill rates and open market interest rates The quick response of these indicators helps the central bank to check the soundness of daily monetary policy decisions Therefore, the ability to influence the final goal (mainly inflation) is also the key factor for the effectiveness of any criteria selected as the operating target The relationship between inflation and interest rates is clearer than the relationship between inflation and reserves, so most central banks in the world have used the short-term interest rate target as their operational goal of monetary policy This is an important theoretical basis for building a research model in chapter 2.2 Monetary policy inflation targets 2.2.1 The introduction of inflation targeting framework In order to effectively operate monetary policy, the central bank needs to choose a nominal ‘anchor’ for monetary policy, such as exchange rates, money supply or inflation This nominal anchorage will 'tightly tie' expectations of inflation, preventing prices from rising or falling too quickly, thereby stabilizing the value of the local currency In the 1980s, the total amount of money as a nominal anchor for central bank monetary policy failed as inflation continued to rise Developed countries must apply tight monetary policy, causing nominal interest rates to rise, leading to a suspension in economic activities More and more people are distrusting the central bank's monetary policy, even though the central bank is committed to trying to keep inflation at a low level This makes inflation expectations higher and higher Therefore, countries need to find a new anchor for monetary policy In 1989, New Zealand became the first country to target inflation as an anchor for monetary policy After that, many countries around the world such as Australia, Canada, Finland, and Spain have applied the inflation targeting monetary policy framework 2.2.2 Monetary policy concept of inflation targeting According to Mishkin (2001), this policy relates to five main components: (1) Transparent of medium-term goals; (2) Monetary authorities should have a commitment to price stability as a key longterm goal of monetary policy implementation; (3) Information strategy including many variables (not only total money supply or exchange rates) used for establishing policy instruments; (4) Transparent information about monetary policy through communication with the public and the market about plans and targets set by policy makers; (5) Strengthen the accountability of the central bank in trying to achieve the set goals of monetary policy 2.3 Experiences in adopting inflation targeting of some central banks in the world 2.3.1 Reasons why central banks choose to inflation targeting Many central banks have accepted the mechanism of inflation targeting policy when monetary targeting framework failed The new monetary policy framework is also consistent with the scientists' view of monetary policy, as follows: Firstly, Milton Friedman and Edmund Phelps have demonstrated that high inflation does not go hand in hand with high growth rates and high employment rates By accepting this view, policy makers no longer view monetary policy as a management tool in the short term, but instead focus on the medium-term goal of price stabilization, which is also considered central target of inflation targeting policy Secondly, scientists as well as policymakers realize that the positive side of keeping inflation low; and that positive side is more beneficial than accepting high inflation to keep high economic growth Therefore, price stabilization has become the main goal of central banks Thirdly, there are many scientific studies on monetary policy that have emphasized the importance of inflation expectations Monetary policy decisions will influence decisions of economic factors If the inflation rate is not fixed, people, businesses will expect the future inflation to continue higher Therefore, the target inflation policy is considered as an effective measure to anchor inflation expectations, thereby, keeping inflation at a low and stable level 2.3.2 Conditions given at the time of application of inflation targeting framework 10 Table 3.1 Summary of research variables Variables Symbol Source Refinance rate R1 SBV Discount rate R2 SBV Nominal exchange rate EX IFS INFLATION ARIC Vietnam Industrial production index IPVN IFS United States Industrial production index IPUS IFS Inflation 3.4 Data analysis method Because data series is integrated of order 1, cointegration phenomenon could occur Therefore, test of cointegration is performed by Johansen method (on Stata 14 software) The above procedure is performed as follows: (1) Stationary test of data series, (2) Determination of optimal lag and cointegration test, (3) Vector error correction model (VECM), ((4) Test the fit and stability of the model, (5) Shock analysis, (6) Forecast error variance decomposition 18 CHAPTER RESEARCH RESULTS 4.1 Research results from the first model 4.1.1 Statistical results The statistical results of the variables used in the model were calculated from Stata software as follows: Table 4.1 Statistics of variables in the first model Variables Mean Standard Minimum Maximum Number of deviation Value value observations R1 8.2 2.84 6.25 15 90 EX 21618.81 812.5778 19497.81 22845.52 90 IPVN 106.9688 31.79286 50.53 195.56 90 IPUS 108.6936 3.048351 101.47 116.23 90 6.2789 5.9055 -0.00221 23.0165 90 INFLATION (Source: Results from Stata software) 4.1.2 Test the stationary of the data series To check the stationary of the data series, the author performs Dickey-Fuller test and results as follows: Table 4.2 Dickey-Fuller test for the first model Variables t- statistics I(0) I(1) R1 -0.565 -6.710*** EX -2.337 -9.026*** IPVN -2.007 -9.549*** IPUS -0.688 -7.452*** INFLATION -1.053 -3.559*** 1% critical value 5% critical value 10% critical value -3.525 -2.899 -2.584 (Source: Results from Stata software) For the collected data series, the Dickey Fuller test results indicate that the data series are not stationary at level (because the statistical value t is 10% greater than the significance 19 level) However, the first-order the data series are stationary, or data series are integrated at the first order, I (1), within 99% confidence interval (because the statistical value t is less than 1% significance level) 4.1.3 Determine optimal latency and cointegration test 4.1.3.1 Determine the optimal latency of the data series The result of the optimal latency selection for the model is done on Stata 14 software as follows: Table 4.3 Optimal latency of the first model Lag LL LR AIC HQIC SBIC 37.8123 37.8697 37.955 -1620.93 -1014.86 1212.1 24.299 24.6436* 25.1552* -978.434 72.848 24.0333* 24.605 25.603 -957.245 42.378 24.122 25.0408 26.4051 -933.044 46.801 24.1592 25.3652 27.1558 (Source: Results from Stata software) If the optimal latency is selected based on the AIC criteria, the optimal latency of the model is In other words, the current value of the current variable is affected by the lag variables of the previous month 4.1.3.2 Test of cointegration After determining the optimal latency, the author performed cointegration test by Johansen method The results from Stata 14 software are as follows: Table 4.4 Johansen test results for the first model Ho: rank £ r Eigenvalues Trace statistic Critical value r=0 97.1386 68.52 r=1 0.42335 48.1421 47.21 r=2 0.24316 23.3470* 29.68 r=3 0.19415 4.1355 15.41 r=4 0.04480 0.0562 3.76 (Source: Results from Stata software) According the table above, we start with the hypothesis H0: r = (line 1) is rejected (by trace statistic> p_value or 97.1386> 68.52) at the 5% significance level Therefore, the test continues with the hypothesis H0: r = This hypothesis is further rejected (by trace statistic> 20 p_value or 48.1421> 47.21) at the 5% significance level Therefore, the test continues with the hypothesis H0: r = This hypothesis is accepted (by trace statistic