UNIVERSITY OF ECONOMICS INSTITUTE OF SOCIAL STUDIES HO CHI MINH CITY THE HAGUE VIETNAM THE NETHERLANDS VIETNAM- NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS THE IMPACTS OF MONETARY POLICY ON OUTPUT GROWTH AND INFLATION IN VIETNAM: A VAR APPROACH A thesis submitted in partial fulfilment of the requirements for the degree of MASTER OF ARTS IN DEVELOPMENT ECONOMICS By VO PHUOC THUAN Academic Supervisor: Assoc. NGUYEN TRONG HOAI and Dr. PHAM KHANH NAM HO CHI MINH CITY, JANUARY 2013 TIEU LUAN MOI download : skknchat@gmail.com ACKNOWLEDGEMENT First of all, I would like to convey sincere thanks to my supervisors Assoc. Nguyen Trong Hoai for his guidance, support and patience ensuring a successful completion of the thesis.
I wish to thank my co-supervisor Dr. Pham Khanh Nam for his encouragement and willingly supports during the thesis writing process with the valuable comments and suggestions. I wish to thank all staffs and my fellow classmates at the Vietnam-Netherlands Programme for M.A in Development Economics for the devoted support and positive interaction throughout the years. I also wish to show my thankfulness to Mr.
Hoang Quang Hung for his devoted help and support in the process of the thesis. I also wish to show my thankfulness to the Vietnam-Netherlands Programme for M.A in Development Economics along with all professors at there which have provided me the knowledge and opportunity to access the best conditions for my study. What I have learned from their lectures not only help me get knowledge for doing the thesis but also provide me more profound understanding on economics particularly and life generally. To my family, no word can express all my love to them.
They have always been my biggest encouragement. I could not have finished this course without them. Thank you, mom and my wife, who always encourage and try their best to give me the best condition so that I can complete the thesis. TIEU LUAN MOI download : skknchat@gmail.com CERTIFICATION I declare that the Thesis, which I hereby submit for the degree of Master of Arts in Development Economics at the Vietnam -Netherlands Programme For M.A In Development Economics - University of Economics Ho Chi Minh City - Vietnam, is the result of my own work with the guidance of the supervisors, except where otherwise stated.
Other sources are acknowledged by explicit references. I certify that the material contained in this thesis has not been submitted in support of an application for another degree or qualification in this or any university. VO PHUOC THUAN Date: January 21, 2013 TIEU LUAN MOI download : skknchat@gmail.com ABSTRACT Understanding of monetary policy and the way it is transmitted to the economy through different channels and the time it needs to take effect are both important, which are "visible hand" that could help the country to get over the challenges to achieve the target. This thesis examines the impact of monetary policy on real output growth and inflation of the urban area, rural area and all over of Vietnam by using the vector auto-regression (VAR) focusing on the reduced-form relationships between money supply, real output growth, price level (of the urban area, rural area and all over of Vietnam), interest rate (lending rate), credit and exchange rate.
The result suggests that money supply have impact on real output growth and inflation in the urban area, the rural area and all over of Vietnam but the impacts are at low percentage. The fact that the thesis cannot find out any channel having the impact on the real output growth, this suggest that monetary policy may take impact on real output growth through other channels which are not mentioned in this thesis. Among the three mentioned channels there is only credit channel has the impact on the inflation. An increase in domestic credit has the positive effects on inflation.
This suggests the need of a system of policies that manage the credit channel in the right way to control inflation rates efficiently. Interest rate channel has been found to be a very important channel of monetary transmission mechanism in other countries but it is not significant in Vietnam. This means that interest rate policy has not been implemented in an effective way. There is also destitute evidence of the response of real output growth and inflations to changes in exchange rate.
This means that exchange rate does not seem to be an important channel of monetary policy as well. TIEU LUAN MOI download : skknchat@gmail.com TABLE OF CONTENT CHAPTER 1: INTRODUCTION. Significant of the study. 4 CHAPTER II: LITERATURE REVIEW.
Theoretical literature review. Mechanism of the impact of aggregate demand to output and price level. Traditional Keynesian IS/LM model. The Mundell-Fleming model.
Monetary transmission mechanism. 9 + The interest rate channel. 9 + The credit channel. 10 + The exchange rate channel.
Conceptual framework for the study. Previous empirical studies related. 23 CHAPTER III: ECONOMY PERFORMANCE, FINANCIAL SYSTEM AND MONETARY POLICY TOOLS IN VIETNAM. Inflation and output growth.
Finacial system and the role of Central Bank in Vietnam. Monetary policy tools. 30 • TIEU LUAN MOI download : skknchat@gmail.33 CHAPTER IV: RESEARCH METHODOLOGY. Data availability and description.
Descriptive analysis of data. Test for stationary property". Model estimation and regression result. 43 b) Extended model with lending rate.
47 c) Extended model with domestic credit. 49 d) Extended model with exchange rate. 51 CHAPTER V: CONCLUSION, POLICY IMPLICATION, LIMITATION, AND SUGGESTION FOR FURTHER RESEARCHES. Limitation of the study.
Suggestion for further researches. 58 TIEU LUAN MOI download : skknchat@gmail. LIST OF ACRONYMS AND ABBREVIATIONS DF test: Dicky Fuller test. E or ER: Exchange rate.
ECB: European Central Bank. VD: Variance Decomposition. FED: The Federal Reserve System is the central bank of the United States. GDP: Gross Domestic Product.
GSO: General Statistic Office. ICOR: Incremental Capital-Output Ratio. DOT: Direction of Trade Statistics. IFS: International Finance Statistics.
IMF: International Monetary Fund.Stat: Organisation for Economic Co-operation and Development StatExtracts. AD-AS model: Aggregate Demand-Aggregate Supply model. ISILM model: Investment-Saving I Liquidity preference-Money supply model. Ms orMS: Money supply.
M2: Broad money or high-powered money. NEER: Nominal Effective Exchange Rate. REER: Real Effective Exchange Rate. NX: Net export.
OIRF or IRF: Orthogonalized Impulse Response Function. P or CPI: Consumer Price Index. pe: Expected Price Level. Pe: Equity price.
TIEU LUAN MOI download : skknchat@gmail.com • 1te : Expected inflation. SBV: State Bank of Vietnam. The United States of America. VAR: Vector Auto-Regression.
LR: likelihood ratio test. FPE: Final prediction error. AIC: Akaike information criterion. SC: Schwarz information criterion.
HQ: Hannan-Quinn information criterion. TIEU LUAN MOI download : skknchat@gmail.com LIST OF FIGURE Figure 2.1: Keynesian AS-AD model.2: A tight monetary policy of traditional Keynesian ISILM model.1: Economic growth- Source: IMF (2012).2: Inflation and real GDP growth rate- Source: IMF (2012).3: Interest rate in Vietnam - Source: State Bank of Vietnam and World Bank website (2012, accessed on November 10, 2012).1: Response of real output growth to money supply.2: Response of inflation of the urban area, the rural area and all over of Vietnam to money supply.3: Response of real output growth to money supply, and price level to money supply.4: Response of domestic credit to money supply, price level to money supply, and price level to domestic credit. TIEU LUAN MOI download : skknchat@gmail.com LIST OF TABLE Table 4.1: Summary of data.2: Stationary tests for variables in level.3: Stationary tests for variables in percentage change.4: Granger causality Wald tests for the basic model with Real output growth, Price level of all over Vietnam, Money supply variables.5: Granger causality Wald tests for the basic model with variables of Real output growth, Price level of the urban area of Vietnam, Money supply.6: Granger causality Wald tests for the basic model with variables of Real output growth, Price level of the rural area of Vietnam, Money supply.7: Variance Decomposition for the basic model with variables of Real output growth, Price level of all over Vietnam, Money supply.8: Variance Decomposition for the basic model with variables of Real output growth, Price level of the urban area of Vietnam, Money supply.9: Variance Decomposition for the basic model with variables of Real output growth, Price level of the rural area of Vietnam, Money supply.10: Granger-causality tests for the extended model with variables of Real output growth, Price level of all over Vietnam, Money supply, and Lending rate.11: Variance Decomposition for the extended model with variables of Real output growth, Price level of all over Vietnam, Money supply, and Lending rate.12: Granger-causality tests for the extended model with variables of Real output growth, Price level of all over Vietnam, Money supply, and Domestic credit. ' TIEU LUAN MOI download : skknchat@gmail.13: Variance Decomposition for the extended model with Real output growth, Price level of all over Vietnam, Money supply, and Domestic credit variables.14: Granger-causality tests for the extended with Real output growth, Price level of all over Vietnam, Money supply, and Exchange rate variables.
TIEU LUAN MOI download : skknchat@gmail.com LIST OF APPENDIX •· Appendix 1: Vietnam's export and import revenues with 25 biggest trading partners from 2005Month5- 2012Month6. Appendix 3: Summary statistics of the variables. Appendix 4: Unit root tests by Augmented Dickey-Fuller (ADF) tests. Appendix 5: Lag length selection of the basic and extended models.
Appendix 6: Granger causality test. Appendix 7: Impulse response functions. Appendix 8: Variance decomposition. TIEU LUAN MOI download : skknchat@gmail.com CHAPTER I: INTRODUCTION 1.
Problem Statement The world economic crisis beginning in 2008 so far have not seen strong recovery trend when adverse shocks occur in almost all countries and continents, while the risk of the European debt crisis still implicit throughout 20 11 and extending until now. In Vietnam, an important point in 2011 is Resolution 11/NQ-CP of the Government with the aim of curbing inflation and macro-economic stability, according to the tightening monetary and fiscal policies are considered carefully and closely throughout the year; in which the monetary policy tools have special importance for the characteristics of Vietnam's economy in influencing the growth and macroeconomic stability. Indeed, current and probably the next few years, the main source of capital for the economy has been mobilized and distributed through the banking system and intermediate credit institutions that these institutions are operating under the regulation of the monetary policy. Therefore, the monetary policy is crucial for the movement of investment capital flows and even business strategy of the business or business sectors.
In fact, monetary policy plays a major role, not only in supporting the business of working capital, but also creating conditions for enterprises that have a good business strategy can be utilized to perform long-term development strategy, through investment. In addition, Monetary policy remains the main tool to price stability, implement foreign trade policy through exchange rate policy and ensure liquidity in the international payment. Because of the above reasons, the understanding of monetary policy and their effect on the macro-economic stability is becoming significantly important to Vietnamese authorities. Furthermore, it is often said that the more open and developed Vietnam is, the easier the economy to be affected by international circumstance as Vietnam was not - 1- TIEU LUAN MOI download : skknchat@gmail.com affected by the Asian crisis in 1997 much as it is being influenced by the global financial crisis from 2008 to now.
Being more sensitive to global economy, it is more crucial to build an effective monetary policy tools system to adjust the economy, especially during the recession. Economic theories and empirical studies shows that shocks in monetary policy could have influence in output and inflation through different channels; however, the detailed impact of those channels on recent Vietnamese economy has not been studied quantitatively such as impact of monetary policy on inflation of the urban area, the rural area and all over of Vietnam instead of in inflation in general.