Data source: Inflation is calculated based on CPI of GSO, M2 growth rate is calculated based on quarterly M2 data of IMF.
Testing the stationarity of time series using ADF test is given in Table 2.5.
Table 2.5: ADF test for stationarity of inflation series and M2 growth rate in the period 1995M1-2008M10
Variable
Test Statistic Augmented Dickey-Fuller Test | ||
Constant | Constant and Trend | |
Level | Level | |
g_CPI | - 3,241 ** | -3,647 ** |
gM2 | -3,399 ** | -3,412 * |
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Note: The symbols * , ** , *** indicate that the variable under consideration is stationary with significance levels of 10%, 5%, 1% respectively.
Estimating model (2.1) for the period 1995M1-2008M10, and checking for defects, the model has no autocorrelation or heteroscedasticity defects, the residuals are white noise. The test rejects the lag variable gM2 in model (2.1), indicating that the lag variables gM2 should not be removed from model (2.1). Similarly, estimating model (2.2) and checking that the model has no defects. The test removing the lag variables g_CPI shows that these lags should be rejected. Therefore, we can conclude that: in the period 1995-2008, the increase in money supply M2 has an impact on inflation fluctuations. Table 2.6 shows the results of the Granger causality test on the relationship between inflation and M2 growth rate in the period 1995M1-2008M10,
shows that: with a significance level of 0.10, the growth rate of M2 money supply is the cause of increased inflation in Vietnam.
Table 2.6: Granger causality test of the relationship between inflation and M2 growth rate in the period 1995M1-2008M10
Pairwise Granger Causality Tests
Sample: 1995M01 2008M12 | |||
Lags: 12 | |||
Null Hypothesis: | Obs | F-Statistic | Probability |
gM2 does not Granger Cause g_CPI | 154 | 1.66248 | 0.08258 |
g_CPI does not Granger Cause gM2 | 1.43926 | 0.15630 | |
Source: Appendix 4.
In a similar manner, consider the causal relationship between the growth rate of money supply M2 and inflation for the period 1995M1-2003M12 using the Granger test given in Table 2.7.
Table 2.7: Granger causality test of the relationship between inflation and M2 growth rate in the period 1995M1-2003M12
Pairwise Granger Causality Tests
Sample: 1995M01 2003M12 | |||
Lags: 12 | |||
Null Hypothesis: | Obs | F-Statistic | Probability |
gM2 does not Granger Cause g_CPI | 96 | 1.19096 | 0.30650 |
g_CPI does not Granger Cause gM2 | 0.87886 | 0.57159 | |
Source: Appendix 4.
The Granger causality test results show that there is no causal relationship between the growth rate of M2 money supply and inflation during the period 1995M1-2003M12. This is consistent with some of the qualitative analysis above.
Thus, the 1995M1-2003M2 data series shows that money supply is not the cause of inflation fluctuations. Expanding the 1995M1-2008M12 data series shows that money supply has an impact on price fluctuations in this period. Therefore, the 2004-2008 period has shown the impact of monetary factors on inflation.
2.3. Summary of Chapter 2
With the presentation of the current situation of inflation in Vietnam in the period 1986 - 2008 and analysis of some causes affecting inflation fluctuations, the Thesis has some comments as follows:
First, let's review the period of very high inflation from 1986 to 1991. 1986 to 1988 were the first years of renovation but there was almost no renovation, the inflation rate was always over 200%. By 1989, the State implemented the most prominent policy in this period, which was the positive real interest rate policy to control inflation. With the strong "high interest rate" policy, inflation in 1989 was successfully controlled, bringing the inflation rate to 34.7%. However, the economy was not stable, so in 1990 to 1991, inflation increased to 67%. In fact, this period showed that the interest rate tool was effective in controlling inflation in Vietnam.
Continuing to examine the inflation trend from 1992 to 2008, especially the period when the general price level increased again in the last 5 years from 2004 to 2008, it shows that the recent inflation fluctuations in Vietnam have been affected by psychological factors. The first reason for the psychological impact is the wage increase project since 2003. The Government's goal of increasing the minimum wage is to offset the
prices, ensuring real wages for workers. However, the wage increase has also created a psychological impact that increases prices, even before the minimum wage increase. In addition, the introduction of a new currency by the State Bank of Vietnam, along with the phenomenon of continuous and abnormal price increases in the past few years, has created expectations of high prices, pushing up inflation.
Another factor related to the fluctuations in Vietnam's inflation during the two decades 1986-2008 is the cyclical variation of real income, or the gap between real output and potential output. If the gap between real income and potential tends to decrease to a low level, then inflation tends to decrease during that period.
In addition, considering the development of inflation with fluctuations in world prices, we see that there is a coincidence between the period of high inflation and the period of high world oil prices. Although it has not been concluded the level of impact of fluctuations in world oil prices on domestic prices, the reality over the past decade shows that Vietnam's inflation fluctuations are affected by world price shocks.
An important factor when considering the cause of the general price increase in recent years, economists must consider the monetary factor. In Vietnam, before 2004, there were many studies supporting the view that currency was not the cause of price fluctuations. Considering the period 2004-2008, the growth rate of M2 had an impact on price increases.
To provide better assessments of inflation, Chapter 3 will apply the theoretical and practical analysis in Chapters 1 and 2 to analyze inflation price dynamics over the past decade using an econometric model approach. Quarterly data collected since 1986 is incomplete, so the thesis only focuses on models in the recent period.
CHAPTER 3
BUILDING A MODEL TO ANALYZE PRICE DYNAMICS - INFLATION IN VIETNAM IN RECENT PERIOD
Up to now, there are many econometric models in the world for empirical analysis of prices - inflation. These models are all based on economic schools to build single-variable or multi-variable econometric models introduced in chapter 1. The goal of econometric models can be to verify the accuracy of assumptions, conclusions of theoretical models or to verify the suitability of the model to a specific economy. The choice of which model to apply, the choice of which economic approach to build the model depends on the economy of each country because each country has its own characteristics. In addition, an equally important factor in choosing a model is the availability or feasibility of data, length and accuracy of data ... especially in conditions like Vietnam.
Before building an inflation analysis model, the thesis devotes section 3.1 to presenting some inflation analysis models in the world and in Vietnam in recent times.
Next, with the analysis of the current situation and some factors affecting Vietnam's inflation in the recent period in Chapter 2, we see that Vietnam's inflation in the past decade has been affected by some main factors such as the impact of psychology, the impact of cyclical demand factors (represented by the output gap), the impact of world price shock factors, the impact of monetary growth factors. Therefore, the thesis has oriented to build an inflation assessment model according to the Phillips curve approach. Section 3.2 will build an inflation analysis model according to the Phillips curve approach. Model according to the approach
The Phillips curve constructed by the thesis has an additional factor of nominal demand affecting inflation, that is, considering the impact of nominal GDP growth, thereby showing the impact of monetary growth on inflation. Therefore, the model constructed by the thesis in section 3.2 includes important factors affecting Vietnam's inflation in the recent period such as currency, output gap, expectations, etc.
With the aim of analyzing price and inflation dynamics in Vietnam, the objective
3.3 of the Thesis applies some models such as seasonal ARIMA, average recovery model to make some comments and forecasts about prices - inflation.
3.1 Some research experiences on price and inflation developments using model approaches
3.1.1. Some studies in the world
a) Some studies on inflation in China
China and Vietnam are countries with developing economies in the process of transition from a developed economy based on a "closed" centralized planning mechanism to a developed economy based on an "open" market mechanism regulated by the State with a socialist orientation. The inflation rate in China before and after the reform also had ups and downs, rising and then falling like in Vietnam. After the reform, inflation was 6% in 1980. By the second half of the 1980s, inflation increased rapidly and reached 18.5% in 1989 (see [49]). In the 1990s, the inflation rate was unstable: at the beginning of this decade, the inflation rate was at a single digit; from 1993-1995, the inflation rate increased to double digits and then returned to single digits. During the years 1999-2002, China's economy experienced deflation, even continuously having negative inflation rates. During the period
In this period, Vietnam also experienced deflation. From 2003 to now, the inflation rate in China has been stable. In 2007, the world situation has had many fluctuations, the US economy grew slowly, the world oil price increased dramatically, causing inflation in other countries to increase. China's inflation in 2007 was 4.8%, the highest in the past ten years, Vietnam's inflation in 2007 was also the highest in this decade.
Although the timing of the transition and the characteristics of each country are different, in many aspects we can see similarities between these two economies. Therefore, China's previous experiences in policy management will be valuable lessons for policy planning and management in Vietnam.
Mohammad (1999) [56] studied the long-run and short-run inflation dynamics of the Chinese economy using the ECM error correction model. This study is based on the traditional monetary model but extends the analysis by adding some other variables to capture the characteristics of the Chinese economy:
P t = 0 + 1 (L) M t + 2 (L) g t + 3 (L) W t + 4 (L) AP t + 5 (L) IP t + t (3.1 )
where P: general price index
M: money supply
g: Output gap compared to potential output, representing excess demand W: basic wage
AP: is agricultural productivity index IP: is industrial productivity index
(L) is the delay operator, is random noise.
The study uses the Johansen-Juselius method to analyze the long-run relationship of the variables in the model (3.1) and the ECM error correction model to determine the short-run and long-run interdependence, and the causal relationship between price and money. In addition, the general price index announced by China does not provide a real measure for measuring the characteristics of inflation. Previous studies on the money-price relationship have focused on the price index announced by the General Statistics Office (Chow, 1987; Huang, 1995). In this study, Mohammad used the correct price index measurement to study the other hidden relationship between money and price. With the statistical technology providing the correct price index, it has clarified the monetary evolution in China's inflation.
The advantage of this model is: Mohammad used modern econometric tools such as Johansen - Juselius cointegration test and ECM test to study the long-run relationship model between money and price, including considering the industrial productivity index and agricultural productivity variables to examine the aspect of structural inflation.
Gerlach and Peng (2006) [49] used the Phillips curve model to analyze inflation in China:
t = 1 + 2 t-1 + 3 g t + t (3.2)
where t is the inflation rate, g t is the output gap, and supply-side shocks are represented by the residual t .
Estimation (3.2) shows that the standard classical model has autocorrelation defect so (3.2) does not show the inflation evolution in Mainland, the authors estimated the Phillips curve model with longer lag:
t = 1 + 2 t-1 + 3 t-2 + 1 g t + 2 g t-1 + t (3.3)