Essays on Vietnam's monetary policy

After more than two decades of registering remarkable growth, the Vietnamese economy has exhibited signs of slowdown. Among challenges facing the economy, monetary policy grabs special attention due to its ineffectiveness and mismanagement. Therefore, further empirical analysis into monetary policy in Vietnam (its objectives of inflation and economic growth as well as its two important instruments of exchange rate and interest rates) may provide useful insights and recommendations for policymakers.

While research on various aspects of the Vietnamese economy and its monetary policy is not rare, an in-depth study making use of multiple data frequencies is missing. As the frequency of data may affect empirical results, this lack makes it difficult for Vietnamese policymakers and researchers to draw conclusions about the impact of variables of interests. In this thesis, the determination of exchange rate and interest rates (of different maturities) is empirically examined using Robust Least Squares (RLS) across quarterly and monthly frequencies before their impacts on inflation (also using quarterly and monthly data) and economic growth are studied over the period between 1996M1 and 2017M3.

Empirical results confirm the crucial importance of data frequency for the effects of variables. Furthermore, results also show that the impacts of some variables are not as expected: while interest rates have positive effect on inflation, exchange rate appreciation may lead to higher inflation and higher growth, suggesting that the central bank in Vietnam (SBV) must take great care when using these instruments to contain inflation or promote growth. In addition to the focus on inflation and growth, regression results of exchange rate and interest rates determination also deserve careful attention. The significance of foreign exchange reserves on exchange rate (across both frequencies) implies that the SBV may affect the exchange rate through this channel. Moreover, the negative impact of money supply on exchange rate (significant at monthly level) may indicate that the current measure of money supply (as simple sum of its components) is no longer appropriate and therefore calls for its reconstruction using Divisia monetary aggregates index (weighted-average sum of monetary components). On the other hand, the outcomes of interest rate models show that the significance of determinants of interest rate varies with its maturities. While the foreign interest rate is only significant for one-year interbank interest rate in Vietnam, money supply tends to affect interest rates of longer-term maturities (at the monthly level) and exchange rate change is likely to affect short-term interest rates. In addition to policymakers and researchers, these results may also benefit money market traders as they can determine whether to borrow or lend in a specific maturity. Together, empirical results related to exchange rate and interest rate determination not only endorses the importance of data frequency but also affirms the role of expected inflation measurement.

The outcomes of this thesis also have implications for policymakers and researchers in other countries. Future conclusions about the impact of any variable should be made with great care as it is either subject to data frequency or how it is measured (such as the case of expected inflation).