Summary of phd thesis international economics monetary policy rule and the applicability in vietnam in the context of international economic integration

MINISTRY OF EDUCATION AND TRAINING FOREIGN TRADE UNIVERSITY - SUMMARY OF PHD THESIS MONETARY POLICY RULE AND THE APPLICABILITY IN VIETNAM IN THE CONTEXT OF INTERNATIONAL ECONOMIC INTEGRATION Major: International Economics Code number: 9310106 NGUYEN THI HONG Hanoi – 2020 The thesis is completed at: Foreign Trade University Science instructor: Assc Prof, Nguyen Thi Thuy Vinh Reviewer 1: Reviewer 2: Reviewer 3: The Thesis will be defended in front of the Thesis Council meeting at university level at Foreign Trade University At hour date .month .year 2020 The Thesis can be found at the National Library and the Library of Foreign Trade University THE LIST OF PAPERS PUBLISHED Nguyễn Thị Hồng, Nguyễn Thị Thùy Vinh, 2020, Kiểm định quy tắc điều hành sách tiền tệ Việt Nam giai đoạn 2007 – 2016, Tạp chí Quản lý Kinh tế quốc tế, Số 128, tháng 5/2020 Nguyễn Thị Hồng, Hồ Thị Diệu Linh, 2020, Thực trạng áp dụng sách tiền tệ phi truyền thống Việt Nam, Tạp chí Quản lý Kinh tế quốc tế, Số 126, tháng 2/2020 Nguyễn Thị Hồng, 2020, Quy tắc sách tiền tệ thực tiễn vận dụng số nước giới, Tạp chí Kinh tế Đối ngoại, Số 122, tháng 10/2019 Nguyễn Thị Hồng, Nguyễn Huy Công Trần Quang Thanh, 2019, Tác động sách lạm phát mục tiêu đến tăng trưởng kinh tế Chile học kinh nghiệm cho Việt Nam, Tạp chí Kinh tế Đối ngoại, Số 114, tháng 2/2019 Nguyễn Thị Hồng, Trần Quang Thanh, 2018, Chính sách tiền tệ phi truyền thống: Bài học từ ngân hàng Trung ương Nhật Bản (BOJ), Tạp chí Kinh tế Đối ngoại, Số 110, tháng 10/2018 Nguyễn Thị Hồng, 2018, Chile’s monetary policy in an inflation targeting framework, Kỷ yếu hội thảo khoa học cấp Trường Đại học Ngoại Thương: “Sustainable development in the Digital Era”, NXB Bách Khoa, tháng 12/2018 Nguyễn Thị Thùy Vinh, Nguyễn Thị Hồng, 2017, Nghiên cứu quy tắc Taylor quy tắc McCallum điều hành sách tiền tệ Việt Nam, Tạp chí Nghiên cứu Kinh tế, Số (464), tháng 1/2017 INTRODUCTION Rationale The central banks have two choices in conducting monetary policy They may follow discretionary policy They may also comply with rules set out before Many studies confirmed that complying with a monetary policy rule brings many advantages over a discretionary policy such as: Ensuring consistency, minimizing fluctuations in output and inflation, Improving the transparency and accountability of the central bank, There are many monetary policy rules, but the choice of rules and the way to follow them depend on each central bank In Vietnam, over the past years, the State Bank of Vietnam (SBV) has actively used monetary policy to moderate the economy However, in some periods, the SBV pursued many goals, which might not be achieved simultaneously; or the SBV moved between different targets just in a short time, which created the unreliability of the commitments of the monetary policy, affecting the effectiveness of the monetary policy due to low ability to influence on the expectation, These lead to an increase in costs for the implementation of monetary policy in the future Vietnam's economy is now increasingly integrated to the world’s economy, so it is impossible for Vietnam’s economy to avoid external shocks To deal with these situations and pursue active and effective monetary policy in the long run, the SBV should follow rules However, most of studies of monetary policy rules in Vietnam paid attention to separate rule rather than hybrid ones, or did not compare between rules to find out optimal ones Based on the above situations, I would like to chose the topic “Monetary policy rule and the applicability in Vietnam in the context of international economic integration” for my doctoral thesis Objectives The general objectives: study monetary policy rules and consider the SBV’s applicability of monetary policy rules on the condition of international economic integration The specific objectives: theoretically systematize monetary policy and issues related to monetary policy rules; draw lessons from experiences in applying monetary policy rules of some central banks in the world; analyze the reality of conducting monetary policy in Vietnam; estimate monetary policy rules for the SBV; consider the impacts of monetary policy tools on macroeconomic goals if the SBV follows the rules; propose the optimal rules and measures for the SBV to successfully apply suggested rules Scope of research The thesis studies monetary policy rules and draws lessons from experiences in applying monetary policy rules of Federal Reserve (Fed), Bank of Japan (BOJ), Bank of Russia (CBR) and Central bank of Chile The thesis analyzes the situation of conducting monetary policy, tests monetary policy rules in Vietnam and evaluates the impact of monetary tools on macroeconomic goals if the SBV follows the rules in the period of Q1/2000 – Q4/2019 Then the thesis suggests the optimal rules for the SBV to 2025, vision to 2030 Methodology - Qualitative approach: statistics, analysis, synthesis and comparison method - Quantitative approach: Ordinary Least Square (OLS), Vector Autoregression (VAR) New scientific contributions - Beside Taylor’s rule, the thesis examine both the McCallum’s rule and the hybrid Taylor-McCallum’s rule, on the condition of international economic integration - The thesis has estimated modified the Taylor’s rule, the hybrid Taylor-McCallum’s rule (interest rate tool) with economic growth gap variable; modified the McCallum’s rule and the hybrid TaylorMcCallum’s rule (monetary base tool) with money supply M2 variable Moreover, the thesis uses lag variables in the above rules - The quantitative results show that the SBV has not only followed the Taylor rule, but also the hybrid Taylor-McCallum rule (M2 tool) to reduce inflation rate, stabilize the economic growth and exchange rate - After testing the rules, the thesis evaluates the impact of monetary tools in these rules on macroeconomic goals in the context of international economic integration Research structure Chapter 1: Theoretical framework and literature review on monetary policy rules Chapter 2: The reality of conducting monetary policy in Vietnam in period of 2000 - 2019 Chapter 3: The estimation of monetary policy rules in Vietnam in the context of international economic integration Chapter 4: The assessment of applicability and some suggestions for successful application of monetary policy rules in Vietnam in the context of international economic integration CHAPTER 1: THEORETICAL FRAMEWORK AND LITERATURE REVIEW ON MONETARY POLICY RULES 1.1 Overview of monetary policy 1.1.1 Definition Monetary policy involves the central bank’s decisions on using measures and tools to adjust money supply, interest rates and quantity of credit to achieve macroeconomic goals 1.1.2 Targets of monetary policy Goals: The final objectives that the central bank wants to achieve such as price stability, high economic growth, high employment, interest rate stability, financial system stability, foreign exchange market stability, Intermediate targets: The variables that the central bank can accurately measure, timely control and have direct effects on goals, such as money supply, interest rate or exchange rate Operating targets: The variables which are directly affected by the central bank’s policy tools like monetary base, reserves, short-term interest rates 1.1.3 Tools of monetary policy Indirect tools: Reserve requirements, refinancing instruments, open market operations (OMOs) Direct tools: credit quota, interest rate or exchange rate control 1.2 Monetary transmission mechanism 1.2.1 Transmission channels Interest channel: Money supply increase → normal interest rate reduce → real interest rate reduce → investment increase → Aggregate demand (AD) increase → output and overall price level increase Exchange rate channel: Money supply increase → domectic currency devalue → trade balance increase → AD increase → output and overall price level increase Asset price channel: Money supply increase → price of assets of firms or households changed → investment and consumption increase → AD increase → output and overall price level increase Banking credit channel: Money supply increase → reserves of banks increase → banks’ ability to provide credit increase → investment and consumption increase → AD increase → output and overall price level increase 1.2.2 Factors influencing monetary transmission (i) Factors from international markets: exchange rate regime, capital flows, dollarization; (ii) Factors related to the balance sheet of the banking system: assets of the banks, liquidity level, the ratio of equity to total assets of the bank; (iii) Factors related to the characteristics of financial system: level of competition of the banking system, the development of the financial market, the depth of intervention of entities in financial market; (iv) Other factors: the central bank’s independence, the state budget deficit and the dominance of the fiscal policy, the asset balance sheet of enterprises and households 1.3 Impacts of international economic integration on monetary policy 1.3.1 The impacts on target of monetary policy The open economy faces many internal and external shocks, so the macroeconomic stability becomes the top priority goal 1.3.2 The impacts of international economic integration on monetary policy tools When the economy increasingly integrates into international economy, the central bank needs to gradually reduce using direct monetary tools and switch to using indirect ones 1.3.3 The impacts on monetary transmission channels Interest channel: The efficiency of the interest rate channel reduces Exchange rate channel: The efficiency of the exchange rate channel is greater Asset price channel: The efficiency of the asset price channel increases Banking credit channel: The role of banking credit channel reduces 1.4 Overview of monetary policy rule and literature review on monetary policy rule 1.4.1 Overview of monetary policy rule There are four original monetary policy rules namely Friedman's money supply growth rule (k% rule), Taylor's interest rate rule, McCallum's base money rule, and inflation targeting rule 1.4.2 Overview of theoretical studies on monetary policy rule 1.4.1 Friedman's rule The money supply should be increased by a fixed percentage (k%) over time: ∆M = k = ∆P + ∆Y - ∆V - Advangtages of k% rule: k% rule is simple and easy to apply - Disadvangtages of k% rule: The effectiveness of the k% rule depends on the stability of two variables, which are real output (Y) and velocity of money (V) In fact, both of these variables are highly volatile - Conditions for applying k% rule: when the economy is stable (real output and velocity of money are stable) 1.4.1.2 Taylor's rule The original Taylor's rule states that monetary authority should adjust the policy interest rate whenever real inflation deviates from the target inflation and/ or real output deviates from the potential output: it = πt + r + α(πt – π*) + β(yt) - Advangtages of Taylor's rule: The original Taylor rule is simple and specific, it can be applied to achieve dual goals, economic growth in short run and price stability in long run Moreover, it helps the central bank to increase accountability and transparency of policies - Disadvangtages of Taylor's rule: The variables required to implement Taylor's rule are not easily calculated directly, but can only be estimated, which may lead to inaccuracies in setting interest rate; The original Taylor rule does not take into account abnormal variables and other macroeconomic conditions that can affect interest rate beside inflation gap and output gap; The rule can only be appplied in stable economy When the economy experiences crisis or falls into unusal situation such as the zero lower bound on interest rates (ZLB), the rule is no longer useful - Conditions for applying Taylor's rule: (i) output target and inflation target are clearly delimiated; (ii) the economy does not fall into a severe recession and the nominal interest rate does not drop to 0%; (iii) the economy has effective instruments to estimate potential output 1.4.1.3 McCallum’s rule McCallum's rule says that the central bank should adjust the base money whenever nominal GDP deviates from its target level: Bt = x* − Vt B +  (x* − xt −1 ) - Advangtages of McCallum’s rule: McCallum’s rule attempts to take into account the possibility of changes in both income and velocity of money The variables required to implement McCallum’s rule seem easier to measure than those required to implement the Taylor’s rule The rule can even be applied when the economy falls into deflation or faces ZLB - Disadvangtages of McCallum’s rule: Taking into account the changes in income and velocity of money may cause difficulties for policy makers to apply the rule; In the rule, the velocity of money is calculated based on the most recent average value, but when to calculate the recent average value is an unsettled question; Choosing unappropriate response coefficient of the base money to the nominal income gap may cause great effects to the economy - Conditions for applying McCallum: (i) output target and inflation target need not to be clearly delimitated, (ii) the economy faces changing velocity of money or falls into deflation, or even faces ZLB (iii) The economy does not has good tools to forecast macroeconomic variables 1.4.1.4 Hybrid Taylor – McCallum rule Hybrid Taylor – McCallum rule may be formed in the following equations: Bt = x* − Vt B + 1 ( * −  t −1 ) + 2 (x* − xt −1 ) Bt =  + 1Bt −1 + 2 ( t −  * ) + 3 yt + 4 (et − e* ) it =  + 1it −1 + 2 (x* − xt −1 ) + 3 (et − e* ) 1.4.1.5 Inflation targeting rule Inflation targeting rule states how much money supply should be adjusted to achieve inflation targeting rate: ∆M = π + ∆Y - ∆V - Advantages of inflation targeting rule: There is no need to know the equilibrium real interest rate or potential yield; The publication of inflation targeting rate is easier to understand than publication of other tools (such as money supply); Public and clear inflation targeting rate helps to gain public's confidence in the central bank's target, transparency and accountability - Disadvantages of inflation targeting rule: The rule does not specify whether the central bank should measure the growth rate of output and the velocity of money in one period, or take the average values over a number of periods or predict them according to the trend; The prerequisites for applying the rule: inflation target is given priority over other targets, the central bank must be completely independent and not subject to any fiscal or political pressures, the economy has healthy and developed financial system, flexible exchange rate regime, - Conditions for applying inflation targeting rule: (i) The central bank is independent from the government; (ii) The economy has good tools to clearly define the monetary transmission mechanism and properly forecast the inflation rate, (iii) The government has balanced fiscal policy, the central bank does not print money to pay debts or finance budget deficit 1.4.3 Overview of empirical studies on monetary policy rules 1.4.3.1 Friedman's rule Typical empirical research on the k% rule is a study of Friedman and Schwartzs (1968) According to the authors, in the late 1960s and early 1970s, the Fed should increase the money supply at a rate between 3% 4%/year 1.4.3.2 Taylor's rule Fed: there are many studies such as Orphanides (2003), Judd and Rudebusch (1998) Taylor (1993a), Taylor (2007), Romanchuk (2015); Bernanke (2015); BOJ: McCallum (2001), Ahearne et al (2002), ECB: Lee and Crowley (2010), Nechio (2011), 20 3.2.1 Methodology The thesis chooses the VAR model to evaluate the impact of monetary policy tools on macro variables in the rules 3.2.2 Model 3.2.2.1 Models and variables Based on the researches of Le and Pfau (2008), Nguyen Thi Thuy Vinh (2015, 2016), the thesis uses the VAR model with endogenous variables namely policy interest rate (PR) or broad money supply M2, the real lending interest rate (LR) (or multilateral real effective exchange rate (REER)/stock price/domestic credit level), CPI, real GDP The thesis adds to VAR model two exogenous variables (the world’s oil price and Fed fund rate - FFR) to take into account the impacts of economic integration to the Vietnam’s economy The order of variables in the VAR model is as follows: the world’s oil price - FFR – PR/M2 - LR/ REER/stock price/domestic credit level CPI - real GDP This order is based on the assumption that the world’s oil price shocks and/or adjustment in FFR causing changes in PR or M2 of Vietnam will be transmitted through interest rate channel/exchange rate channel/asset price channel/credit channel to output and price level However, there is no impact of the changes in Vietnam's economy to the world’s economy because Vietnam is just a small and open economy Where: - The world’s oil price (Oil): represents the world’s energy price - FFR: the adjustment of FFR causing PR/M2 to change reflects the influence of international financial markets on domestic financial markets - PR or M2: tools of monetary policy - Interest rate channel: LR is selected to represent the interest rate channel The LR is calculated on the assumption that the public base on inflation rate in the previous period to calculate current inflation rate - Exchange rate channel: The thesis choose REER, which is calculated by multiplying bilateral real exchange rates to the power of trade weights, where trade weights are the shares of the two-way trade between countries with Vietnam The currencies chosen in the basket of currencies to formulate REER are currencies of major Vietnam’s trading partners (including USD, EUR, CNY, THB, JPY, SGD, KRW, 21 TWD) An increase in REER means a real revaluation of domestic currency, which negatively affects Vietnam’s trade balance CPI tVN wit REERt =  ( NERit  ) CPI ti i =1 - Asset price channel (stock price): the thesis consider VnIndex (VNI) as a stock price index - Credit channel: domestic credit level (CREDIT) is selected to represent the credit channel - CPI: Change in CPI means change in price level - Real GDP: the economy’s output 3.2.2.2 Data and data sources - The data used are quarterly data, from Q1/2000 to Q4/2019 (except stock price data collected from Q3/2000) Real GDP data (at 2010 price) are collected from GSO Other data are from IFS - Variables (except PR, LR and FFR) are converted to natural logarithm and seasonally adjusted by Census X-12 method 3.2.3 Results 3.2.3.1 Unit root test The results of ADF unit root tests show that variables (FFR, PR and LR) are stationary in the case of intercept and trend, but variables (Oil, M2, REER, VNI, CREDIT, CPI GDP) are non stationary intercept and trend However, these variables are stationary after taking first differences Moreover, all of the variables are cointegrated If the time series are nonstationary but have a cointegration relationship, the Vector Error Correction Model (VECM) or the VAR model can be used In this thesis, the author uses the VAR model in levels, in which variables converted to natural logarithm, to compute the impact of monetary policy shocks on output and price level 3.2.3.2 Optimal lag length test - For the interest rate tool, the optimal lag length in the interest rate channel, the exchange rate channel, the asset price channel, and the credit channel is 6, 5, and respectively - For the money supply tool, the optimal lag length in the interest rate channel, the exchange rate channel, the asset price channel, and the credit channel is 6, 5, and respectively 22 3.2.3.3 Sustainability test The results of sustainability test of VAR models (with the interest rate tool or money supply tool) show that there is no root outside the unit circles, which mean the VAR models are sustained 3.2.3.4 Granger causality test a Interest rate tool Firstly, PR Granger causes both price level and output in the channels namely interest rate, asset price and credit channel, but PR Granger causes price level rather than output in exchange rate channel Secondly, stock price and credit level Granger cause both price level and output, but LR Granger causes output rather than price, while exchange rate Granger causes price level but not output Thirdly, PR Granger causes LR, but does not Granger causes exchange rate, asset price and credit level These mean that the transmission of monetary policy through exchange rate, asset price and credit channels were very weak Therefore, to achieve the goals of the monetary policy, along with adjusting the PR, the SBV had to use measures to directly influence transmission channels b Money supply tool Firstly, M2 Granger causes price level rather than output in most channels (except in the interest rate channel, causes both price level and output) Secondly, a change in lending interest rate affects both price level and output; Fluctuations of the stock price have influence on price level but not have impact on output; Exchange rate and credit level go up or down cause output to fluctuate but no effect on price level Thirdly, there are causal relationships from the adjustment of money supply M2 to LR, exchange rate, asset prices and credit level 3.2.3.5 Impulse response function analysis To see how output and price level respond to monetary shocks, the thesis uses the Cholesky impulse response function, in which the order of variables is Oil, FFR, PR (or M2), transmission channel, CPI, GDP a Interest rate tool Response of price: in all channels, an increase in PR only reduces inflation rate in a short time (in which the impact of an increase in PR on the price level is smallest in the exchange rate channel, is largest in the credit channel Therefore, to stabilize price level, contractionary monetary policy should be performed persistently and strongly enough 23 Response of output: generally, there is no much difference in responses of output to an increase in PR between channels at the early stage When the SBV raise PR, output continues to go up in the first quarter, the growth rate slowed down in the second quarter Output starts to decline by the third quarter, and hits the lowest level in the fourth quarter, and then rises back in the 5th quarter b Money supply tool Response of price : in all channels, when the SBV expands M2, the CPI does not grow immediately Price starts to go up from the 3rd quarter onwards and reaches peak in the 6th quarter, then it stabilizes gradually Response of output: output only starts to increase in the second or third quarter when the M2 increases In which, output increases soonest and highest in interest rate channel, but latest and lowest in exchange rate channel In short, a money supply shock affects output in the short run, while it affects price level longer This is completely consistent with the macroeconomic theories, in the long run, the cause of inflation is an increase in money supply 3.2.3.6 Variance decompositions The thesis use Cholesky decomposition to analyze the volatility of price level and output caused by money shocks via different channels in the 12 quarters (3 years) The order of variables is Oil, FFR, PR (or M2), transmission channel, CPI, GDP a Interest rate tool The results of variance decompositions reveal that FFR, PR are important factors bring fluctuations to price level and output in interest rate and credit channels If the Fed changes the FFR, the SBV will adjust the PR, which leads to movement in price level and output Changes in PR strongly affects LR, especially at the early stage, so the interest rate channel plays more important role than other channels in explaining the volatility of both price level and output However, the effect of PR on LR gradually fall, while the impact of PR on credit level gradually rises Therefore, in emergent situations, the SBV should adjust PR to quickly and strongly affect LR to achieve monetary goals 24 b Money supply tool The world’s oil prices and the FFR are also important factors affecting Vietnam’s prices and output When oil price fluctuate and/or Fed changes FFR, the SBV will vary the money supply to reduce the negative impacts of these shocks on the domestic economy Among channels, interest rate channel contributes larger part than the others to the volatility of price and output This result means the interest rate channel is still the main transmission channel of monetary policy Investigating the role of M2 on channels reveals that M2 is a decisive element causing changes in credit level The result implies that, to keep inflation rate low, the SBV has to lower M2, thereby reducing the credit level of the economy 3.2.4 Conlusions on the impacts of monetary policy tools on macroeconomic goals Firstly, when the world’s oil prices fluctuate and/or Fed changes FFR, the SBV will adjust PR or money supply to reduce negative impacts of these shocks on the domestic economy As results, adjustments in the PR can affect both price level and output in the economy, but adjustments in M2 are likely to affect price level rather than output Therefore, instead of money supply M2 tool, interest rates tool should be used as an intermediate target of monetary policy to achieve two above goals However, it is still necessary to control the growth rate of M2 to keep inflation rate low more successfully Secondly, related to interest rate tool, the interest rate channel is still the main transmission channel of monetary policy, the monetary transmission through the other channels are still very weak Therefore, the SBV has to directly affect variables such as exchange rate, asset price or credit level to reach the set goals Related to M2 tool, although M2 influences the price level through all channels, the interest rate channel still plays a more important role than the others Thirdly, PR is an important factor causing instabilities in LR, especially at the early stage, but the effect of PR on LR gradually decreases The M2 is a decisive element causing the change in credit level and over time the effect increases Therefore, in emergent situations, the SBV should quickly adjust PR and control the growth rate of M2 to stabilize credit level and achieve the goals of monetary policy 25 CHAPTER 4: THE ASSESSMENT OF APPLICABILITY AND SOME SUGGESTIONS FOR SUCCESSFUL APPLICATION OF MONTARY POLICY RULES IN VIETNAM IN THE CONTEXT OF INTERNATIONAL ECONOMIC INTEGRATION 4.1 Experiences in applying monetary policy rules of some central banks in the world 4.1.1 Fed The original Taylor rule proposed by Taylor for the US case has the following equation: it = πt + + 0,5(πt – 2) + 0,5(yt) After the Taylor introduce his rule, many economists used the rule to examine the way Fed conducting monetary policy in the past, they found that Tayor's rule was quite suitable to describe the Fed’s behavior during the 1920s, 1960s, 1970 – 1997 (especially 1987 – 1992), 1993 – 2003 However, from 2003 to 2006, the US’s monetary authorities did not comply with the Taylor’s rules, the FFR was much lower than the rate suggested by Taylor’s rule This contributed to a surge in house demand and house prices during that period, which leaded to the boost and collapse of financial markets in 2007 4.1.2 BOJ In fact, the BOJ has never made any official notices on whether they apply monetary policy rules or not, but based on orientation of monetary policy, it can be said that BOJ referred Taylor’s rule and McCallum’s rule in some periods such as the 1980s and 1990s However, when the economy experienced crises (e.g 1973 – 1975, 1990 – 2000), the Taylor's rule became irrelevant, while the McCallum's rule seemed more effective 4.1.3 CRB The studies testing the CRB’s performance of monetary policy with modified Taylor’s rule, modified McCallum's rules and modified hybrid Taylor-McCallum’s rule show that in the period of 1992 – 2002, CBR considered money supply as the main tool of monetary policy and the CBR’s adjustment of money supply was accordant with McCallum's rule However, from 2004 to 2017, the McCallum rule was no longer suitable to explain how the monetary policy was operated by CBR, but the modified Taylor rule was quite accurate Russian 26 monetary policy makers changed interest rate to stabilize price level and output In addition, interest rate was varied to react to the volatility of exchange rate and oil prices 4.1.4 Central bank of Chile Chile is the second country (to New Zealand) that has shifted to the inflation targeting (IT) framework, due to lack of lessons from its predecessors, Chile gradually switched to inflation targeting policy Chile officially announced the transition to IT policy from September 1990, but until September 1999, the country applied the policy completely Chile's IT policy is considered to be quite successful, it has helped Chile lower inflation rate and stabilize the economy The inflation rate has fallen to around 3% nowadays from an average inflation rate of over 20% in the 1980s, economic growth rate has been high for many years These bring Chile from an emerging market into the most developed country in South America 4.2 Assessment of the applicability of monetary policy rules in Vietnam 4.2.1 The independence of the SBV The independence of the SBV has improved in recent years, but it is still limited in both legal and practical aspects Specifically: - The degree of policy independence: In the legal aspect, the SBV is gradually moving from the 4th level of “limited autonomous independence” to the 3rd level of “autonomous independence in operating tools” - The degree of financial independence: In the legal aspects, the SBV still finances the State’s budget to deal with temporary bugdet deficits according to the decision of Prime Minister - The degree of personnel independence (political independence): The level of personnel independence of the SBV is low, all employees of the SBV are civil servants recruited and paid by the Government 4.2.2 The stability of the economy Due to the impacts of the world economic crisis in 2008, the Vietnam’s economy has experienced a period of macroeconomic instability (2008 - 2011) From 2012 onwards, the economy gradually stabilized and achieved the following achievements: economy was recovered and stabilized, inflation rate was at the target level, the 27 money market and the foreign exchange market were stable, state budget deficit decreased gradually, 4.2.3 The delimitation of monetary policy goals Generally, in the period of 2000 - 2019 (except for 2008-2011), the SBV's priority target of inflation was still dominated by the Government's target of economic growth However, the delimitation of inflation and economic growth targets is becoming clearer since the Prime Minister approved the Strategy for the development of Vietnam’s Banking industry to 2025, with a vision to 2030 on August 8, 2018, which emphasized "reforming the monetary policy framework towards the highest priority goal is controlling inflation rate" 4.2.4 The statistics and capacity of analysis and forecasting ➢ The statistics: Vietnam’s statistics industry has recently improved significantly: many series of data have been publicly and freely available on websites; information is quite timely, information technology is widely and effectively applied in collecting statistical information, However, in the fact, the statistics published right after the end of the month/quarter/year are only considered as estimated statistics and often not accurate with the official figures Moreover, there are large gap between statistics of different sources in the country, between statistics of GSO and those of international financial institutions such as IMF, WB, ADB, ➢ The capacity of analysis and forecasting: Currently, the SBV has developed and implemented prediction methodologies and prediction models The SBV initially formed a framework for policy analysis and evaluation In addition, the SBV has actively researched and carried out early warning systems for monetary and banking crises, However, the forecasting capacity is still weak, especially forecasts on macroeconomics and financial markets still not meet the requirement of monetary policy Most forecasts are short-term ones, while medium and long-term forecasts are not paid much attention Moreover, the quality of analysis and forecast is still low, the forecast results are not highly accurate and different from the reality Based on the above analysis, it can be concluded that the conditions for sucessful application of monetary rules in Vietnam have not been fully met, but have been reached to certain level Lessons from other 28 countries shows that the central banks still apply the monetary policy rule even when they not meet all the necessary requirements because those requirements can be gradually met during implementation time Moreover, in recent years, the SBV has also followed certain principles when they operated monetary policy to achieve macroeconomic goals Therefore, in the coming time, the SBV is capable of complying with monetary policy rules to increase the activeness, transparency and efficiency of monetary policy 4.3 Strategy and direction for monetary policy On August 8, 2018, the Prime Minister issued Decision No 986/QD-TTg approving the Strategy for the development of Vietnam’s banking industry to 2025, with a vision to 2030, with major objectives and tasks as follows: For the SBV: Increase the independence, activeness and accountability For credit institutions: Improve financial capability, governance and operation capacity of credit institutions; Improve the competitiveness of the banking industry, increase transparency to ensure that after 2020 the banking market will nearly operate in accordance with market principles; Develop a system of standard indicators to evaluate the stability and safety of financial market For the operational framework of monetary policy: Renovate the monetary policy framework towards the top priority goal is low inflation; Gradually shift from using money supply tool to using interest rate tool; Using indirect measures, gradually remove administrative measures on interest rates when the requirements are met For the managerial framework of foreign exchange: Renovate the foreign exchange management toward continuing to implement a managed floating exchange rate regime, manage the exchange rate more flexibly and closely to changes in the domestic as well as international financial market; Perform synchronously measures to nearly eliminate the dollarization; For the statistics industry, analysis and forecast: Improve the quality and efficiency of monetary statistics, forecasting analysis; Enhance the application of information technology, upgrade the software program for reporting, analizing and processing statistics; 29 Complete the information collection and sharing method within the banking sector, as well as with other sectors 4.4 Selection of monetary policy rule for Vietnam In the coming time, when the economy is still stable, the author suggests that the SBV should continue to refer to the modified Taylor rule in open economy to adjust PR However, if the economy faces shocks such as economic crisis, high inflation, The SBV may consider applying the hybrid Taylor - McCallum rule with the M2 money supply tool to increase flexibility and efficiency of monetary policy In the long run, the SBV should follow many central banks in the world which use interest rate tools to pursue flexible inflation targeting policy Meanwhile, the SBV should still comply with the modified Taylor rule During the application of the rules, the SBV should modify the rule by adding new variables or look for new rules which are more appropriate and effective 4.5 Policy recommendations for successful implementation of monetary policy rule 4.5.1 Choose interest rate as intermediate target of monetary policy 4.5.1.1 Select target interest rate (or policy interest rate) In the short term, the SBV may continue to use some interest rates (e.g prime interest rates, refinancing interest rates and discount interest rates) as the policy interest rate But in the future, when the money market and the capital market develop more, the SBV should choose interbank interest rate as official rate and intermediate target of the monetary policy The SBV also should maintain the band of interest rate ceiling-floor in which interbank interest rates fluctuate 4.5.1.2 Gradually reduce the direct intervention of the SBV The SBV should further restrict the use of direct tools and gradually reduce the incentives for priority areas 4.5.2 Increase the degree of independence, transparency and accountability of the SBV 4.5.2.1 Increase the degree of independence Firstly, increase policy independence: In the short run, Government need to reduce intervention in conducting monetary policy In the long run, the National Assembly needs to review and amend the Law on 30 State Bank of Vietnam 2010 and related regulations on the tasks and powers of the SBV to enhance the position and independence of the SBV in performing monetary policy Secondly, increase financial independence: It is necessary to minimize direct or indirect borrowings of the Government from the SBV by improving the efficiency of the Government expenditure, issuing appropriate measures and strict sanctions to ensure compliance with fiscal discipline; In the long run, it is necessary to amend and supplement regulations so that the SBV may refuse to finance budget deficits which beyond the annual planned deficit budget approved by the National Assembly It is necessary to have regulations on the conditions, scale and the purpose of Government’s loans from the State Bank Thirdly, increase personnel independence: The term of the SBV's leaders should differ from that of the National Assembly and the Government, for example, the term of the SBV's leaders may be longer or interspersed between the terms of the National Assembly and Government 4.5.2.2 Increase the transparency The SBV needs to design and formulate specific communication strategies in the short, medium and long run Communication must ensure to clearly state the operating direction, operating plan, tools used and issues related to the use of monetary policy tools 4.5.2.3 Increase the accountability Beside explaining monetary policy to the National Assembly and the Government, the SBV needs to pay more attention to explaining monetary policy to the public The SBV needs to timely and clearly explain the changes in policies, achievements, limitations and causes Moreover, the SBV needs to work out a specific roadmap and solutions to achieve target back If the SBV fails to reach its objectives, it must be accountable to the National Assembly 4.5.3 Improve the quality of commercial banks’ balance sheets and the competitiveness of the banking system 4.5.2.1 Improve the asset quality of the banking system Firstly, effectively control credit quality and credit growth; allocate credit flows to domestic production and business, especially to small and 31 medium enterprises and enterprises in the efficient, productive and hightech sectors to limit bad debt Secondly, improve risk management capability, governance skills; modernize infrastructure and upgrade information technology of credit institutions Thirdly, improve the efficiency of banking inspection and supervision in order to ensure disciplines on the money market, the foreign exchange market, and ensure the safe operation of credit institutions; Renovate the inspection and supervision model of the financial system basing on international practices and standards 4.5.2.2 Increase the commercial bank's liquidity To prevent the commercial banks' liquidity risks from occurring, the SBV needs to well know the liquidity situation of each commercial bank In addition, the SBV needs to regularly inspect and closely supervise the commercial banks in order to promptly detect problems and handlte them In the long run, the SBV should introduce strict sanctions forcing commercial banks to absolutely comply with the regulations on liquidity safety in particular and on doing business in generally 4.5.2.3 Improve the competitiveness of the banking system Firstly, it is necessary to continue to restructure credit institutions in the direction of gradually reducing the number but increasing the quality of credit institutions, towards forming a large and more competitive credit institutions not only in the country but also in the regional area and the world Second, it is important to build an attractive and stable legal environment with consistent policies to bring a fair business environment to all types of credit institutions to help them develop Thirdly, it is also necessary to tighten the management, operation licensing and network expansion of credit institutions, only allow to expand the network to credit institutions with good governance, efficient operation and strict compliance with legal regulations 4.5.4 Develop financial market Develope money market through enhancing financial capacity, operational efficiency and competitiveness of credit institutions; Diversify transaction tools and methods on money market; Modernize payment infrastructure and improve the quality of the banking system's 32 information through applying digital technology, financial technology (Fintech), Besides, develop the capital market to become an effective medium and long-term capital supply channel for the economy in the direction of focusing on depth rather than broad development; Liberalize the capital market through eliminating market access conditions, develop derivative financial tools to increase transaction volume on the stock market 4.5.5 Continue to reduce dollarization and increase the flexibility of the exchange rate 4.5.4.1 Reduce dollarization To continue to sustainably reduce the dollarization of the economy, the SBV need to to improve the position and convertibility of the VND, increase the reserve requirement ratios for foreign currency deposits, implement foreign currency credit quota for credit institutions, gradually shift the borrowing-lending relationship to purchase-sale relationship for the foreign currencies In the long run, stop lending foreign currencies, tightly regulate that VND is the only means of cash payment in the territory of Vietnam 4.5.4.2 Increase the flexibility of the exchange rate In the short run, the SBV should consider widening the fluctuation band of the exchange rate and reduce direct intervention in the exchange rate In the long run, the SBV should gradually gives up announcing the daily average interbank exchange rate and let it be decided by market forces The SBV should only use indirect monetary instruments to moderate the economy 4.5.6 Improve the quality of statistics and the capacity of analysis and forecasting Improve the quality of statistics: Complete and synchronize data collection methods to avoid the difference in data between sources; Increasingly apply technology in collecting and processing information to have accurate, timely and fully information; Improve the quality of statistics management; Strengthen coordination in exchanging and providing information among ministries and industries Improve the capacity of analysis and forecasting: Build and complete modern methods and tools for forecasting, study and apply 33 reporting tools, develop specialized forecasting software; develop a contingent of analysts and forecasters, regularly train, retrain and update professional knowledge for analysts and forecasters; Equip and upgrade machinery and equipment to renovate in analysis and forecasting CONCLUSIONS To achieve the thesis’s general goals of studying monetary policy rules and assessing the applicability of monetary policy rules in Vietnam in the context of international economic integration, the thesis has completed the following specific objectives: Firstly, the thesis has theoretically systematized monetary policy and issues related to monetary policy rule The thesis has also synthesized theoretical researchs and empirical researchs in the world and in Vietnam Secondly, the thesis has used qualitative methods to analyze the reality of conducting monetary policy in Vietnam in the period of 2000 – 2019 and applied quantitative methods to estimate monetary policy rules for the SBV in that period with the condition that international economic integration was taken into account Quantitative analysis results show that, in the period 2000 - 2019, the SBV followed the modified Taylor rule to adjust interest rates or the hybrid Taylor-McCallum rule to adjust the money supply M2 to reach the set goals Thirdly, the thesis has evaluated the impact of monetary policy tools in the rules on macroeconomic goals in the context of international economic integration The results suggest if the SBV applies the modified Taylor rule, it can pursue both inflation and output (or economic growth rate) stability, but if the SBV choose the hybrid Taylor-McCallum rule with the money supply tool, it can achieve inflation stability rather than output stability Fourthly, the thesis has accessed the applicability of monetary policy rules in Vietnam Assessments show that, the conditions for successful application of monetary policy rules in Vietnam have not been completely achieved but have been reached to a certain level, so the SBV can comply with monetary policy rules to increase the activeness, transparency and efficiency of monetary policy In the short run, the SBV should follow the modified Taylor rule In the long run, the SBV should 34 follow the hybrid Taylor - McCallum rule with the interest rate tool to apply flexible inflation targeting policy Fifthly, the thesis has made some recommendations to help the SBV successfully apply monetary policy rules: (1) Choose interest rate as intermediate target of monetary policy; (2) Increase the degree of independence, transparency and accountability of the SBV; (3) Improve the quality of commercial banks’ balance sheets and the competitiveness of the banking system; (4) Develop financial market; (5) Continue to reduce dollarization and increase the flexibility of the exchange rate; (6) Improve the quality of statistics and the capacity of analysis and forecasting ... goals of studying monetary policy rules and assessing the applicability of monetary policy rules in Vietnam in the context of international economic integration, the thesis has completed the following... APPLICATION OF MONTARY POLICY RULES IN VIETNAM IN THE CONTEXT OF INTERNATIONAL ECONOMIC INTEGRATION 4.1 Experiences in applying monetary policy rules of some central banks in the world 4.1.1 Fed The. .. policy in Vietnam in period of 2000 - 2019 Chapter 3: The estimation of monetary policy rules in Vietnam in the context of international economic integration Chapter 4: The assessment of applicability