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The determinants of financial instability in emerging countries: The case of Vietnam

By Le Ton Quang Phat (VNP 23)

Supervisor: Dr. Vo Hong Duc

Dr. Howard Nicholas

Abstract:

The study mainly aims to determine a precise definition and to identify the determinants of financial instability in Vietnam and other emerging countries.. The theoretical literature review is conducted under the existing debates of two polar camps of the literature about financial instability which is claimed by Monetarists (represented by Friedman and Schwartz (1963)) and Post Keynesians (represented by the Financial Instability Hypothesis of Minsky (1989)). Regarding general explanation of causes of financial instability, the Monetarists’ basic definition of financial instability is the illiquidity in money markets, meanwhile, the fundamental definition of Post Keynesians is about collapsing credit thus collapsing asset prices.. When it comes to the causes of financial instability in the context of emerging countries, capital flows from advanced economies should be taken into account as an additional determining factor. Accordingly, Monetarists and Post Keynesians are debating whether the capital outflows or inflows, respectively, are the cause of financial instability thus leading to a full-scale crisis. After reviewing the conditions of Vietnam financial instability during the period 2006-2008, the study finds that the valid view to explain the evolution of financial instability is from Post Keynesian. Therefore, the most powerful indicators in warning an upcoming financial crisis worth emphasizing are credit expansion, capital inflows in form of cash or foreign portfolio investment ,performance of banks’ balance sheet and interest rates.

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