The 35th WORKSHOP
Monetary policy is one of the most important macroeconomic policy instruments, as it can affect the economy through various channels. Understanding monetary transmission mechanism is thus an important task for the central bankers in all countries in the world, including the Vietnam. In the August workshop, VDF-Tokyo invited Mr. Le Viet Hung, a MA student at GRIPS, and an on-leave expert of the State Bank of Vietnam (SBV), to share his findings on the monetary transmission mechanism in Vietnam.
Mr. Hung started his presentation by making a review of theories and empirical studies on the monetary transmission mechanism, in which four main channels, including interest rate, exchange rate, asset price, and credit, were discussed. Many similar studies using vector autoregression (VAR) technique have been conducted in a number of countries, such as Japan, Jordan, Singapore, the US, and Thailand. Mr. Hung also showed that there have been a handful of studies on this field for the Vietnamese economy.
Before proceeding further with the empirical analysis, the presenter discussed the current conduct of the monetary policy in Vietnam. It was indicated that, among three main policy instruments, i.e. discount policy, open market operation, and reserve requirements, the last one had been used frequently. Mr. Hung also presented about foreign exchange and exchange rate policies in Vietnam, which have been gradually liberalized under requirements of integrating in the regional and global economies.
The presentation was continued with a description of methodology and data. In his research, Mr. Hung used quarterly, seasonally-adjusted data during 1996Q1-2005Q4 with a basic VAR model, in which output, consumer price index (CPI), real lending rate, and domestic credit volume were some of the key variables. The estimated results from the model showed that about 50 percent of shocks in output were due to money, while only about 4 percent was attributed to real interest rate. In other words, real interest rate was weak factor in influencing the economyfs output during the study period. The examination for exchange rate channel indicated that the real effective exchange rate (REER) accounted for only 26 percent of shocks in output after five quarters. Explaining for such weak impact, Mr. Hung said that the situation could be due to capital controls and rigid exchange rate regime. Similar estimated results were found for the credit channel, in which this variable accounted for only 23 percent of the shocks in output after eight quarters. Such situation was again, according to Mr. Hung, due to the fact that most of loans have been given to state-owned enterprises (SOEs) under the governmentfs direction. Based on these findings, Mr. Hung provided some policy implications and directions, in which improving the SBV independence, using interest rate as policy stance, and making exchange rate more flexible were emphasized.
The Q&A session was begun by some questions and comments from Mr. Vu Tuan Khai (YNU & VDF-Tokyo). Mr. Khai wondered about the possible changes of the estimated results if the orders of the variables were changed. In addition, Mr. Khai was also surprised that M2 did not have significant influence on CPI, and would like to know Mr. Hungfs comments on this finding. In his response, Mr. Hung said that his model was applied in many empirical studies, but he would revise the model to examine other channels or to see how the estimated results would be changed when the SBV would have different policy objectives. For the second question, Mr. Hung said that CPI would be affected by a number of factors, such as oil prices, food and food-related goods, so the finding was reasonable and understandable.
Also commenting on the model, Prof. Wade Pfau (GRIPS) suggested that Mr. Hung check whether interest rate in Vietnam was correlated with the Fed rate. Moreover, he commented that some other variables would also be added in the model in order to examine what Mr. Khai was concerned about. Ms. Nguyen Thu Hien (GRIPS & SBV) said that, there were many economic events in Vietnam and regional and global economies during the study period, and thus it would be more useful if Mr. Hung could introduce some dummy variables representing for these events to see how the estimated results might be changed. In his answer, Mr. Hung thanked for these insightful comments, and said that he would conduct the research at a greater detail.
Discussing about the result, Mr. Mochammad Pratomo (GRIPS) said that we always needed specific policy measures to get price stability, but the estimates showed a long-time adjustment for the monetary policy in stabilizing prices in Vietnam. Therefore, he wondered of how to adjust prices in the short-term. In his feedbacks, Mr. Hung said that there would be many channels for the SBV to achieve price stability in the short-term, and he thought that more flexible exchange rate would be one of these short-term policy measures.
After listening to all the comments and questions, Prof. Kenichi Ohno (GRIPS & VDF-Tokyo) made some more comments on the model as well as policy implications of the research. According to him, the estimated results might be ambiguous, because monetary transmission mechanism in Vietnam must be different from other countries, and the model used in the research obviously could not capture all specific characteristics of the Vietnamese economy. To illustrate for his comments, Prof. Ohno said that Vietnam has been absorbing a large capital inflows, which stimulated domestic consumption through numerous channels. As such, increasing prices in Vietnam were inevitable. Also, explaining Mr. Khaifs concern about weak impact of M2 on CPI, Prof. Ohno said that M2 might be too endogenous, and Vietnam did not have many alternative policy instruments to manage prices. Overall, he suggested Mr. Hung compare the results of the model with and without capital flows.
Going further with the model, Prof. Ohno commented that the current VAR model might not be able to capture all the things due to lack of many influential channels, such as remittances, foreign direct investment (FDI), and emerging portfolio investment flows. He said that the financial crisis in Thailand and other regional economies in 1997/98 could be a factor to be considered in the model. Also, information about foreign exchange reserve would be important for the model, as it might reflect how Vietnam could manage exchange rate under various economic conditions. In his answer, Mr. Hung agreed that the current model could not provide gone-for-allh menu of policies for Vietnam, and thus the revised version of the research would be substantially different from this version, as all the suggested variables would be considered.
At the end of the presentation, Mr. Hung thanked all the participants for their useful comments and suggestions on the research. He said that he hoped to share new estimates of the research as soon as he could.
We then had one-hour informal meeting. Some new participants introduced themselves and their research interests. Many current policy issues were discussed. In the next workshop on Saturday, September 22, 2007, we will welcome Mr. Vuong Thanh Long from Kobe University to share his research findings on the stock market in Vietnam.
(By Giang Thanh Long)
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