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The impacts of monetary policy on output growth and inflation in Vietnam: A VAR approach

By Vo Phuoc Thuan (VNP 15)

Supervisor: Dr. Nguyen Trong Hoai Dr. Pham Khanh Nam

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.

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