5.2.2 For the transmission of Vietnam's monetary policy 186
5.2.3 For Vietnam's financial integration 188
5.3 LIMITATIONS OF THE STUDY 191
CONCLUSION OF CHAPTER 5
193
CONCLUSION 194
REFERENCES 197
APPENDIX................................................................................................ ccxii
LIST OF VIETNAMESE ABBREVIATIONS
Acronym
Vietnamese phrases | |
CSTT | Monetary policy |
HNTC | Financial integration |
State Bank of Vietnam | State Bank |
Central Bank | Central Bank |
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LIST OF ENGLISH ABBREVIATIONS
Acronym
Vietnamese phrases | English phrases | |
ADB | Asian Development Bank | Asian Development Bank |
ARDL | Autoregressive Delay Distribution Model rule | Auto-Regressive Distributed Lag |
BOP | Balance of payments | Balance of Payment |
GEM | Global Economic Outlook | Global Economic Monitor |
GMM | Total Estimation Method kumquat | Generalized Method of Moments |
IFS | International Financial Statistics | International Financial Statistics |
IMF | International Monetary Fund | International Monetary Fund |
OLS | Least square method best | Ordinary Least Square |
SVAR | Structural autoregressive vector | Structural Vector Auto-regression |
TSLS | Least square method at least two stages | Two-Stage Least Squares |
VAR | Autoregressive vector | Vector Auto-Regression |
VIX | Global Risk | Volatility Index |
WB | World Bank | World Bank |
LIST OF TABLES
Table 3.1 Calculation of variables and expected signs of ARDL model 108
Table 3.2 Data types and data sources used in the ARDL model 109
Table 3.3 Summary of measurement methods of variables and data sources in the SVAR model 117
Table 4.1 Vietnam's real level of financial integration in the period 2009 - 2019
................................................................................................................................ 131
Table 4.2 Vietnam's level of financial integration in terms of detailed capital flows by capital flow components 134
Table 4.3 Final goals of Vietnam's monetary policy in the period 2009 - 2019 139
Table 4.4 Intermediate targets of Vietnam's monetary policy in the period 2009 - 2019 141
Table 4.5 Open market operations in Vietnam in the period 2009 - 2019 143
Table 4.6 Required reserve ratio in Vietnam in the period 2009 - 2019 145
Table 4.7 Descriptive statistics of variables in the ARDL model 152
Table 4.8 Stationarity test results of data series in ARDL model
................................................................................................................................ 155
Table 4.9 Contour test results 156
Table 4.10 Results of long-term impact estimates 156
Table 4.11 Short-term impact estimation results 157
Table 4.12 Results of autocorrelation test of ARDL model 158
Table 4.13 Results of testing variance variation of ARDL model 159
Table 4.14 Results of testing research hypothesis 160
Table 4.15 Descriptive statistics of variables in the SVAR model 162
Table 4.16 Stationarity test results of data series in SVAR model 165
Table 4.17 Results of determining the optimal lag of the SVAR model 165
Table 4.18 Results of autocorrelation test of SVAR model 166
Table 4.19 Results of long-term interest rate variance decomposition in Vietnam 170
LIST OF IMAGES
Figure 1.1 Total international capital flows of Vietnam in the period 2000 - 2019 2
Figure 1.2 Average interbank exchange rate/central exchange rate (VND/USD) period 2000 - 2019 3
Figure 1.3 Short-term and long-term interest rates in Vietnam from 2009 to 2019 4
Figure 2.1 Central bank strategy 37
Figure 2.2 Monetary policy transmission mechanism 58
Figure 2.3 IS - LM Model 62
Figure 2.4 Mundell-Fleming Model 64
Figure 2.5 The Impossible Trinity 66
Figure 2.6 Factors affecting the transmission process of CSTT 71
Figure 3.1 Research implementation process 102
Figure 4.1 Vietnam's foreign direct investment 124
Figure 4.2 Growth of foreign direct investment in Vietnam 125
Figure 4.3 Vietnam's foreign indirect investment 127
Figure 4.4 Growth of foreign indirect investment in Vietnam 128
Figure 4.5 Other investment capital of Vietnam 129
Figure 4.6 Components of other investment capital in Vietnam 130
Figure 4.7 Vietnam's real level of financial integration 132
Figure 4.8 Vietnam's level of financial integration by capital flow composition
................................................................................................................................ 133
Figure 4.9 Vietnam's real level of financial integration by capital flow direction 133
Figure 4.10 Vietnam's financial integration level compared by two methods
................................................................................................................................ 135
Figure 4.11 Actual level of financial integration compared with countries in the Southeast Asian region 136
Figure 4.12 Real level of financial integration by capital flow composition compared with countries in the Southeast Asian region 137
Figure 4.13 Number of open market operations in Vietnam during the period 2009 - 2019 142
Figure 4.14 Operating interest rates of Vietnam's monetary policy in the period 2009 - 2019
................................................................................................................................ 147
Figure 4.15 Exchange rate (VND/USD) period 2009 – 2019 150
Figure 4.16 Evolution of indicators in the ARDL model during the period 2009Q1 – 2019Q2
................................................................................................................................ 153
Figure 4.17 Results of stability testing of the ARDL model 158
Figure 4.18 Trends of variables in the SVAR model during the period 2009M1 – 2019M8 164
Figure 4.19 Results of stability testing of the SVAR model 167
Figure 4.20 Response of Vietnam's long-term interest rates to global risk shock and US long-term interest rate shock 168
Figure 4.21 Responses of Vietnam's long-term interest rates to output shocks, inflation and domestic short-term interest rates 169
Figure 4.22 Decomposition of long-term interest rate variance in Vietnam 171
RESEARCH INTRODUCTION
1.1 REASON FOR THE STUDY
Practical context
The main objective of monetary policy is to maintain the stability of the currency value in order to promote economic growth and create jobs. However, the context of increasing financial integration is posing challenges to the conduct of monetary policy of countries. In terms of policy and in academic research, the independence of monetary policy is one of the most fundamental problems of an open economy (Taguchi, Nataraj & Sahoo 2011). A famous theory known as the Impossible Trinity in international macroeconomics suggests that a country can only pursue two of the three options: fixed exchange rate, independent domestic monetary policy, and free movement of international capital flows or financial integration (Mankiv 2009). Therefore, if there is no restriction on international capital flows while the exchange rate is kept fixed, it will hinder the ability to conduct an independent monetary policy. In addition, many studies argue that global financial integration has made domestic financial conditions more volatile with changes in external capital markets. Domestic financial markets are also more sensitive to global factors, causing short-term and long-term interest rates to increasingly diverge. While short-term interest rates are directly controlled by domestic monetary policy, long-term interest rates are affected by external factors when the economy opens up to international investors, making it more difficult to control long-term interest rates. Because long-term interest rates affect both financial and real economic activities, the disconnect between short-term and long-term interest rates will make it difficult to manage financial and macroeconomic stability.
Along with the increasingly strong trend of financial globalization, Vietnam is also gradually opening its market to attract international capital flows to promote domestic economic growth.
45,000
40,000
35,000
30,000
25,000
20,000
15,000
10,000
5,000
0
(million USD)
Figure 1.1 Total international capital flows of Vietnam in the period 2000 - 2019
Source: IMF (2020)
Vietnam's investment capital flows have increased rapidly since joining the World Trade Organization (WTO) in 2007 (Figure 1.1). In addition, the exchange rate has been kept at a fairly stable level in recent times (Figure 1.2). According to Vietnam's report to the IMF, exchange rate management is a managed floating mechanism. However, according to IMF calculations (2019), the exchange rate (VND/USD) remains stable within a 2% range, and the exchange rate in Vietnam according to actual developments is classified by IMF (2019) as a stabilized arrangement, a form of exchange rate management under a soft peg mechanism. The tight exchange rate management combined with the trend of increasing financial integration is posing a challenge to Vietnam's monetary policy independence.
25,000
20,000
15,000
10,000
5,000
0
Figure 1.2 Average interbank exchange rate/central exchange rate (VND/USD) period 2000 - 2019
Source: IMF (2020)
In addition, with the increase in international capital flows (Figure 1.1), Vietnam's short-term and long-term interest rates have tended to move differently over many years (Figure 1.3). The implementation of monetary policy in some years also has a large gap between the results achieved and the set inflation target. The developments in interest rates as well as the results of monetary policy management have raised the issue of considering the transmission of monetary policy in the current conditions of increasing financial integration.