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Analysis of Monetary Policy Shocks in the New Keynesian Model for Viet Nams Economy: Rational Expectations Approach

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Beyond Traditional Probabilistic Methods in Economics (ECONVN 2019)

Part of the book series: Studies in Computational Intelligence ((SCI,volume 809))

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Abstract

The study estimates the SVAR model for Vietnam’s economy based on the New Keynesian model for the small open economy, taking into account the forward-looking behavior exhibited by economic agents. Deep structural parameters are identified by placing exclusion restrictions on the VAR innovations and the covariance matrix. The study affirms the important role of interest rates through monetary policy shocks in controlling inflation and macroeconomic stability. In addition, the exchange rate shock reflects Viet Nam’s exchange rate management mechanism, which is in line with the SBV’s management objective in an opened economy but with a controlled flow of capital. In addition, the aggregate demand shock shows the impact of interest rates and inflation on output volatility of the economy in the way of reducing interest rates, stabilizing inflation but increasing output, this is also the SBV’s final goal. In contrast, this study shows that the approach method is not general, has not set the rational expectations channel in combination with other transmission channels for analysis; the transparency, public credibility with the SBV policy or the control of capital flows in Vietnam are also a barrier for this channel to maximize its effectiveness. Finally, the study reaffirms the crucial role of monetary policy in managing monetary policy effectively, recommending the SBV to improve its planning, analyzing and forecasting policy towards a sustainable and stable growth.

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Notes

  1. 1.

    IS/LM - AS/AD: Investment Saving/Liquidity Preference Money Supply - Aggregate Supply/Aggregate Demand [49].

  2. 2.

    There are approximately 20 central banks in 2012 according to Hamilton [31].

  3. 3.

    The output gap is defined as the difference between the actual output of the economy and its potential output. (Bank of Canada, 2012). This text can be found at: bankofcanada.ca - search for “backgrounders”.

  4. 4.

    According to Leu [43].

  5. 5.

    Equations from (i) - (iv) are derived from the IMF’s study [25].

  6. 6.

    According to Mishkin [49], when the Fed wants to evaluate the changes in the economy by raising short-term interest rates from 5% to 8%. The term structure equation used with past data indicates that there is a slight variation in long-term interest rates. However, if the public finds that short-term interest rates are rising steadily, the rational expectation theory suggests that the economic agents will no longer expect short-term interest rates to increase at present. Instead, when they see interest rates increase by 8%, they will expect the average short-term interest rate to rise significantly. Then the long-term interest rates will increase sharply, but not in the interest rates’s term structure. Therefore, it can be seen that evaluating the results of the Fed’s policy change with econometric models can lead to misleading.

  7. 7.

    The rational expectations theory was first introduced in 1961s by Muth but the public has just really focused on this theory when Lucas introduced it at the Carnegie-Rochester Conference (1973–1976).

  8. 8.

    The HP filter is a univariate detrending algorithm that extracts the potential output component by minimising a particular loss function. The smoothness of the HP stochastic trend depends on the input value of an ad - hoc smoothness parameter. For quarterly data [33] recommended setting the smoothness parameter to 1600.

  9. 9.

    This lag is consistent with Leu’s [43] study which is commonly used to obtain a result with time series data. Given the quarterly data and its relatively small sample size, the upper bound was set at 4 lags for both endogenous variables and 1 lag to 4 lags for exogenous variables. However, the system of equations in VAR (4, 1) and VAR (4, 2) failed to reject the null of no serial correlation. Therefore, the study examined the lag of exogenous variables to seek a more parsimonious specification. Using the likelihood ratio test in which VAR (4, 4) and VAR (4, 3) fit, there is no autocorrelation problem.

  10. 10.

    The calculation’s method of confidence interval has based on bootstrapping technique with 5000 times simulation [68].

  11. 11.

    The central exchange rate is determined on the basis of reference to the weighted average exchange rate movement in the inter-bank foreign exchange market, the exchange rate movement in the international market of foreign currencies of several countries having trade, lending - borrowing relations or large investment with Vietnam, the macro - economic and national monetary balances in line with the SBV monetary policy targets. The new method of managing exchange rate allows exchange rate system to be determined more flexibly in line with the domestic supply and demand of foreign currencies, the fluctuations of exchange rate in the international market, while ensuring the role of the SBV in managing the monetary policy [19].

  12. 12.

    According to Bloomberg (2008) on the level of currency stability of several currencies in Asia, VND is considered to be currency in the most stable group. As of 31/12/2017, the central exchange rate between VND and USD announced by the SBV was at 22,425 VND/USD, increasing by 1.2% compared to that in late 2016.

  13. 13.

    In Directive No. 01/CT - NHNN dated 10/1/2017 on implementing the monetary policy and ensuring safe and effective banking operations in 2017, the State Bank of Vietnam has guided” the management of interest rates in line with changes in macroeconomy, inflation and the monetary market to stabilize interest rates; On the basis of the ability to control inflation, stabilize the foreign exchange market, strive to reduce lending interest rates.

  14. 14.

    The \(1^\text {st}\) shock: aggregate demand shock; the \(2^\text {nd}\) shock: inflation shock, the \(3^\text {rd}\) shock: exchange rate shock, the \(4^\text {th}\) shock: interest rate shock.

  15. 15.

    Vietnam’s economic growth and inflation rate since 2001 have shifted from “relatively high growth, low inflation” to “high growth, moderate inflation” (2004–2007), then moved to the position of “good growth, high inflation” (2008–2011), “low growth, low inflation” (2012–2014), and to this stage is” growth and inflation (2015–2017). Results of the last 3 years (2015–2017) show that the relative stability of the economy is a condition for the accumulation of factors necessary for the later high growth period (Chu, K. L, 2018) [19].

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Authors and Affiliations

  1. Banking University, 36 Ton That Dam Street, District 1, Ho Chi Minh City, Vietnam

    Nguyen Duc Trung & Le Dinh Hac

  2. Thu Dau Mot University, 06 Tran Van On Street, Thu Dau Mot City, Binh Duong Province, Vietnam

    Nguyen Hoang Chung

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  1. Nguyen Duc Trung
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  2. Le Dinh Hac
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Correspondence to Nguyen Hoang Chung .

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Editors and Affiliations

  1. Department of Computer Science, University of Texas at El Paso, El Paso, TX, USA

    Vladik Kreinovich

  2. Banking University HCMC, Ho Chi Minh City, Vietnam

    Nguyen Ngoc Thach

  3. Banking University HCMC, Ho Chi Minh City, Vietnam

    Nguyen Duc Trung

  4. TTC Group, Ho Chi Minh City, Vietnam

    Dang Van Thanh

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Trung, N.D., Hac, L.D., Chung, N.H. (2019). Analysis of Monetary Policy Shocks in the New Keynesian Model for Viet Nams Economy: Rational Expectations Approach. In: Kreinovich, V., Thach, N., Trung, N., Van Thanh, D. (eds) Beyond Traditional Probabilistic Methods in Economics. ECONVN 2019. Studies in Computational Intelligence, vol 809. Springer, Cham. https://doi.org/10.1007/978-3-030-04200-4_39

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