Download completing conditions to implement monetary policy under inflation

MINISTRY OF EDUCATION
THE STATE BANK OF VIETNAM
AND TRAINING
BANKING ACADEMY
------------oOo------------
NGUYEN THI HIEN
COMPLETING CONDITIONS TO IMPLEMENT MONETARY
POLICY UNDER INFLATION TARGETING FRAMEWORK
IN VIETNAM
SPECIALITY: FINANCE – BANKING
CODE: 62.34.02.01
SUMMARY OF
ECONOMICS DOCTORAL THESIS
HANOI – 2015
THE THESIS IS CONDUCTED AT
BANKING ACADEMY
Instructors:
1. Assoc.Prof.Dr. To Kim Ngoc
2. Dr. Nguyen Thi Kim Thanh
Examiner 1:
Examiner2:
Examiner3:
The Thesis is presented to the witness of Doctoral Council at grassroots level at
….hour…..date…..month…..2015 at Banking Academy
The thesis can be accessed at:
-
Library of Banking Academy
-
National Library of Vietnam
RELATED RESEARCHES OF THE AUTHOR WHICH HAVE BEEN PUBLICIZED
1.Nguyen Thi Hien(2015), Flexibility in monetary policy management in Vietnam
and some recommendations, Banking Magazine, No. 9, May/2015.
2. Nguyen Thi Hien(2015), Current situation of monetary policy management in
Vietnam and opportunities for adopting inflation targeting policy, Financial and Currency
Markets Magazine, No. 10, May/2015.
3. Nguyen Thi Hien(2015), Inflation Control in Vietnam, Period from 2005 to
present – Suggestions for the period 2016-2020, Financial and Currency Markets Magazine,
October/ 2015.
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PREAMBLE
1. Reasons of the research
20 years gone with remarkable ups and downs, Vietnam economy is facing high rate
of inflation, and also, in line with several achievements in inflation control by releasing
effective regulations on monetary policy management of the State Bank of Vietnam (SBV)
Since 2012, inflation is basically controlled at single-digit level; however, such long-time
low rate of inflation is not likely to be a pledge of the State Bank of Vietnam for price
stability and rising price still remains possible hindrances at any time affecting the
sustainable development of Vietnam. Moreover, policy management of SBV is facing
numerous obstaclesdue to the synchronous goals of inflation control, growth assistance,
market interest rate stability in the mean time with exchange rate stability, payment
assurance, handling bad debts and assisting State Budget etc.,
This prompts Vietnam to seek for a management mechanism of monetary
policy(MP) which enables a more efficient curb on inflation and concurrently keeps the
economic growth at reasonable rate.
Worldwide history observes the successful adoption of Inflation Targeting Monetary
Policy (ITMP)in some emerging economies where quite a few macro-economic difficulties are
seen. It is asserted in the draft of banking development strategy for period of 2011 – 2020 that
setting up premises of ITMP would be among flagship solutions that ultimately reform the
monetary policy management framework and enhance the performance of State Bank.
The realization of such guidelines requires initially a comprehensive scientific theoretical
conception which lays the foundation of step-by-step renovation of State Bank’s monetary policy
management. For that reason, writer delves into “Consolidating conditions of monetary policy
on inflation targeting basis in Vietnam”as the subject of his Doctoral thesis.
2. Overview of the Research situation
a. Worldwide researches
Recent decades have seen the worldwide adoption of ITMP, which sufficiently
enables the studies, both theoretical and experimental, on the scope and efficiency of ITMP.
Various countries have numerous researches carried out in inflation targeting oriented
monetary policy framework, primarily focusing on fundamentals and practicality of
inflation targeting (IT) framework such as: (i) concept, definition and classification of MP
on IT basis; (ii) prerequisites for the adoption of ITMP; (iii) advantages/disadvantages of
ITMP in comparison with MP on basis of other conventional targets (namely exchange rate,
monetary supply, etc.); (iv) impacts of ITMP on primary macro-economic variables; (v)
effectiveness and efficiency of this framework in response to abnormal economic
phenomenon (i.e. commodity price shocks, crisis shocks); (vi) practical experiences of
countries introducing ITMP and lessons to grasp; and (vii) other relevant contents.
b. Domestically based researches
ITMP remains a rather new issue in Vietnam, which answers why Vietnam has no
comprehensive research carried out in this field other than the latest study of To Anh Duong
et al (2012). In the context of knotty inflation happenings under a growth-oriented model,
To Anh Duong et al (2012) provides initial quantitative judgments on the possibility of
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ITMP adoption in Vietnam. At the onset, the research presents a panorama of major
objectives of MP framework factually realized in nations. It then summarizes the nations’
experiences in directing MP on IT basis under different backgrounds and manners.
Accordingly, it assesses the feasibility of framework in Vietnam, and maps out necessary
conditions as well as the route of framework introduction. Though required conditions have
not been met, researchers state that Vietnam may implicitly enact MP on IT basis since
2012. The inflation rate targeted for first five year of adoption should be 6%, with tolerate
amplitude of 2%.
Beside the above mentioned research, some articles cite the framework of MP on IT
basis and provide preliminary analysis on conditions to introduce this framework in
Vietnam. Most of articles share the opinion that Vietnam’s MP management has not been
capable of an all-inclusive incorporation of IT framework, and it is in need of a preparation
guideline for conditions to be realized.
Collectively considered, researches mostly have not gone far beyond theoretical
study and world’s experience analysis. Dawning recommendations and guidelines for
Vietnam are limited to the view of 2015. It is veritably essential, especially for State Bank
of Vietnam – the governing agency that plans and executes national monetary policy - to have indepth researches on possibility and conditions of as well as condition consolidation solutions for the
introduction of ITMP from now to 2020.
3. Subject and scope of research
The thesis exclusively delves into conditions to adopt the framework, especially in a
developing country.
The thesis provides an insight into MP, ITMP and possibility, guideline, and
necessary conditions of introduction of such framework in Vietnam.
4. Researching purposes of the thesis
The thesis is carried out in seek of answer for such questions as: (i)What are primary
conditions to be realized as a base for ITMP execution? (ii) How has MP been managed in
Vietnam? What has been achieved, what disadvantage has emerged? (iii) It is rational for
Vietnam to adopt ITMP? (iv) What should be done to condition the adoption of this
framework in Vietnam at present time?(v) Solutions and guidelines to sufficiently facilitate
the execution of ITMP in Vietnam?
5. Methodology
Summarizing, analysis, specialist methodological research on world’s experiences;
Statistics and deductive method; and inductive method are mobilized in this thesis.
6. New findings of the thesis
Firstly, the thesis provides full and scientific commentary to identify four condition groups
system of measurement and assessment criteria, which every economy is obviously required to
adopt the Inflation Targeting Policy. This is an important framework for scientific basis to assess
the central banks worldwide as well as the central banks of Vietnam with respect to their
preparation and completion to adopt the Inflation Targeting Policy.
Secondly, instead of selecting a few countries around the world to learn the
international experience, the thesis has approached and analyzed four conditions selected as
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theoretical framework for the countries where have been adopting the Inflation Targeting
Policy to consider how did they complete these conditions in the course of operating this
framework.
Thirdly, the thesis identified the level of satisfaction of conditions to adopt the
Inflation Targeting Policy in Vietnam, showing that Vietnam must make its best efforts to
meet the conditions to effectively adopt the Inflation Targeting Policy framework in all four
condition groups.
Fourthly, the thesis researched and proposed factors affecting Vietnam banking
system, systematized the point of view, oriented the implementation of the LPMT operating
mechanisms in the context of Vietnam’s deep integration into the world economy,
particularly analyzed the topical issues such as joining the TPP, AEC and its effects on the
operation of the banking system and operation of monetary policies under the inflation
targeting in Vietnam.
Fifthly, the thesis proposed three solutions and routes of completing
conditions. These solutions and routes are proposed based on adequate scientific and
practical foundation, and can be synchronously applied in policy-making agencies such as
State Bank of Vietnam and other regulatory agencies to complete the conditions for the
inflation targeting framework in coming stages in Vietnam.
7. Structure of the thesis
Chapter 1. Theoretical basis of monetary policy and necessary conditions to adopt
monetary policy operating framework under the inflation targeting
Chapter 2. Current situation of the operation of monetary policy of Vietnam in the
period from 2005 up to now and conditions to adopt monetary policy operating framework
under the inflation targeting
Chapter 3. Solutions and routes of completing conditions for monetary policy
framework under the inflation targeting in Vietnam
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CHAPTER 1
THEORETICAL BASIS OF MONETARY POLICY AND NECESSARY
CONDITIONS TO ADOPT MONETARY POLICY OPERATING FRAMEWORK
UNDER THE INFLATION TARGETING
1.1. MONETARY POLICY AND MONETARY POLICY FRAMEWORK UNDER
INFLATION TARGETING
1.1.1. Fundamentals of monetary policy
1.1.1.1. Concept and characteristics of the Monetary Policy
Monetary policy is a macroeconomic management tool carried out by the central
bank through using their tool system to affect the amount of cash (or interest rate) in
economies in order to achieve macroeconomic targets such as price stability, economic
growth, employment and other targets.
1.1.1.2. The target system of the monetary policy
The target system of the monetary policy includes: final target, intermediate target
and operational target.
1.1.1.3. Transmission channels of the monetary policy
There are four channels through which the monetary policy affects the economic
sectors, including: interest rate, credit, exchange rate and asset price.
1.1.1.4. Monetary policy frameworks through history
Generally, there are two ways of classification: classification based on ultimate
targeting criteria or classification based on tools. With the classification based on the
ultimate targeting, the monetary policy framework is divided into three categories, including
multi-target monetary policy (to pursue both monetary stability and growth), single-target
monetary policy (to pursue the monetary stability) and inflation targeting policy
(concretization of monetary stability at the price indices). With the classification based on
tools, monetary policy framework is divided into four following categories: Exchange Rate
Targeting; Monetary Targeting; Interest Targeting; Inflation Targeting.
1.1.2. Monetary policy framework under inflation targeting
1.1.2.1. Concept
The thesis has defined the inflation targeting as follows: Inflation targeting is a
monetary policy system in which the ultimate target is low and stable inflation, and the
intermediate target is the consistent inflation forecast deviation throughpublic
announcements and the mechanism of strengthening accountability of the central banks.
1.1.2.2. The advantages and disadvantages of IT
a) The advantages of IT
(i) ITP increases the autonomy and flexibility of central bank in the implementation
of macro-economic target; (ii) inflation targeting promotes the controlling effectiveness of
inflation expectations, accordingly it helps to get stability in inflation; (iii) inflation
targeting contributes to reduce impact of shocks; (iv) ITP promotes growth without increase
in the volatility of output.
b) The disadvantages of IT.
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(I) ITP is too stiff and is not an ideal monetary policy framework, it only focuses on
achieving inflation and neglects other targets such as growth and employment, which may
cause increase in the instability of the economy; (ii) IT may weaken the accountability of
the central bank, (iii) IT cannot prevent the domination of fiscal policy and the flexibility of
exchange rate; adopting IT also leads to financial instability.
1.1.2.3. The basic pillars of ITP
(i) Determining the inflation target and inflation forecasts; (ii) the commitment and
implementation responsibility of the central bank; (iii) the understanding and trust of the public.
1.1.2.4. The version of the ITP executive framework
(i)Flexible Inflation Targeting; (ii)Flexible Price-level Targeting- PLT; (iii) Financial
stability- Incorporating Inflation targeting ITFS.
1.2. CONDITIONS TO ADOPT MONETARY POLICY FRAMEWORK UNDER
THE INFLATION TARGETINGAND MEASURABLE INDICATORS
1.2.1. The level of institutional independence of the Central Bank
1.2.1.1. Independence of policies
Independence of policies or independence of tools enables the central bank to be
flexible in planning and implementing the monetary policy. Accordingly, the Central Bank
must manage the monetary policy with a relatively independent level, which means that it
does not require the full independence from the government, but it must have the right of
freely running the monetary policy to achieve inflation targeting that is deemed as
appropriate by the government.
1.2.1.2. Independence of economies
Independence of economies is that the central bank was freed from the oppressive
fiscal/ political pressure, which means that the government does not rely on the central
banks offsetting the budget deficit; discipline in revenue and expenditure of the budget must
be ensured
1.2.1.3. Political independence.
Political independence of the central bank is understood as the influences of the
Government in the appointment procedure, term of office and dismissal of the board of the
Central Bank Governor.
1.2.2. The capacity of the Central Bank
1.2.2.1. Database Systems
Database Systems include data on inflation, the micro and macro-economic
indicators in the past as a basis for economic forecasts. Failure to update or regularly
publish database systems on month or quarter basis will make the Central Bank lack of
realistic assessment of market performance, thereby affecting the orientation and dosage of
monetary policy instruments.
1.2.2.2. The inflation forecast model
Inflation forecast model is the tool used to technically process econometric aspect of
input data. Most central banks adopt ITMP use a system of model including statistical
forecasting and spreadsheet models containing the economic structure, macroeconomic and
Dynamic Stochastic General Equilibrium (DGSE). The use of various models with different
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targets may enable Central Bank to provide theoretical basis and data with the qualitative
assessment to make a final decision.
1.2.2.3. Inflation forecast capacity
Human factor takes charge of statistics, analysis and communication. The training in
econometrics, macro-economic understanding and building suitable forecasting models is
important in forecasting inflation. Policy makers must have certain knowledge about the
transmission channels of monetary policy tools and inflation; thereby they can determine the
time lag in the adjustment of the tools of monetary policy and its impact to inflation rate.
1.2.2.4. Mechanism of transparency and accountability
Along with independence, the countries under Inflation targeting framework
should also have a mechanism to ensure accountability and transparency of the central bank.
The degree of transparency and consistency in regulating monetary policy plays an
important role to gain public confidence.
1.2.2.5. Monetary policy credibility
Public confidence towards commitments, management ability of the central bank
and effective implementation of monetary policy plays a key part in Inflation targeting
framework. In order to gain such confidence, it is required to maintain a transparent policy
which is deemed as the most important solution; in addition, the communication program
should be fully implemented to ensure people and market to master policy objectives, way
of policy transmission and its performance as well.
1.2.3. Health of financial system
Inflation targeting framework requires a strong financial market with market order
and discipline and healthy competitiveness. It is also a fairly important condition. The
developing countries often face difficulties in applying Inflation targeting basis due to the
weakness of financial markets. (Batini, 2005) because the financial system needs to develop
in a certain level to ensure that the monetary policy is implemented by using financial
markets tools and the pursuit of monetary policy in inflation target without being influenced
by fluctuations in financial markets (Laurens et al, 2005).
1.2.3.1. Strong financial and banking system
A strong banking system along with an effectively and safely developed capital market
is a necessary condition for the success of Inflation targeting basis. Even in case of the weak
banking system, the Central bank cannot raise interest rates to control inflation at target
because if it’s like that, it will lead to the collapse of the financial system. This can not only
directly cause the collapse of Inflation targeting mechanism but also lead to the collapse of
currencies and financial crisis and thus seriously compromising inflation control.
1.2.3.2. Health of fiscal policy
Fiscal stability is a necessary fundamental condition to control inflation, as well as
ensuring the operation of Inflation targeting mechanism. Some articles have given
comments that: A neglect fiscal policy will increase pressure to monetary authorities for
financing of repayment, leading to an accelerating in money supply and inflation rate. A
fiscal imbalance at a high level will make monetary policy eventually become dependent
on fiscal decisions (so-called as the dominance of fiscal policy) and the inflation target
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will probably be abolished or seriously changed.
1.2.4. Economic structure
1.2.4.1. Level of dollarization in economy
Dollarization reduces the efficiency of controlling and regulating monetary policy by
the Central bank and also being a reason why the central bank cannot control the entire
volume of currency and means of payment in the economy and making difficulties in
identification, classification and forecasting on means of payment changes. Besides,
dollarization also causes numerous obstacles in deciding to correctly and timely regulate
money supply by central banks. All foregoing matters will lead to the distortion in
regulating monetary policy to achieve the inflation control target via intermediate objectives
by dollarization.
1.2.4.2. Sensitivity of the exchange rate channel.
The sensitivity of exchange rate channel must also be low. In fact, some countries
have exerted to combine both mechanisms of inflation targeting and exchange rate
framework but this combination arises many contradictions. Then, these countries finally
have applied a flexible exchange ratein a larger margin or completely removed exchange
rate target.
1.2.4.3. Openness of the economy
Openness index is an economic metric used to measure open trade policy of a
country and the more liberalization trade policy towards, the largeropenness of the
economy. The openness index is often calculated by the ratio of exports to GDP, imports to
GDP or 2-way trade to GDP.
1.3. EXPERIENCES IN COMPLETING CONDITIONS TO IMPLEMENT MONETARY
POLICY UNDER INFLATION TARGETING FRAMEWORK OF OTHER COUNTRIES
AND LESSONS TO VIETNAM
By studying experiences of other countries, six lessons to Vietnam have been drawn,
including:
(i) By studying experiences of other countries, we find thatit is not required for a
country to have full of these foregoing conditions to be able to switch to Inflation targeting
basis. However, such countries are also not encouraged to apply Inflation targeting basis
without regard to these conditions.
(ii) the necessary conditions for the central bank to possibly and feasibly implement
Inflation targeting basis are: the central bank’s independence in use of monetary policy
instruments; without outstanding central bank loans to Government; Price stability as an
overriding objective of monetary policy; health of financial and monetary system; having
high consensus on the importance of inflation targeting; public confidence in the central
bank and basic understanding of monetary policy and its transmission mechanism.
(iii) The view on fully converging all such conditions to implement Inflation targeting
basis is incorrect because evidences show that it is absolutely possible to implement in the form
of "default" or "learning by doing", the outstanding conditions will be improved time by time
with the efforts and determinations of the Government and the Bank.
(iv) It should not announce in application of Inflation targeting basis prior to
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achieving some minimum conditions under Inflation targeting framework. Experience has
also shown that it should apply Inflation targeting basis in the condition of maintaining
inflation at a quite low rate in a certain period. But this is not so much bound. Establishment
of market trust has important significance in improving the efficiency in regulating
monetary policy in general and for Inflation targeting basis in particular.
(v) Completion of supporting conditions for the success of Inflation targeting basis
framework is also a motivation to promote the process of setting up possible application of
a complete Inflation targeting basis.
(vi) The prerequisite for the Inflation targeting is the central bank’s scope of
independent operation for monetary policy. It should be remembered that such
independence is unnecessarily in legal status, but remain autonomy to use monetary policy
instruments to pursue targets. Independence allows the central bank to have long-term view
and avoiding pressure on time as well. Studies have shown that the independence of central
bank is a key factor for a successful application of the Inflation targeting framework.
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CHAPTER 2
ACTUAL SITUATION IN REGULATING MONETARY POLICY IN VIETNAM IN
THE PERIOD OF 2005 TO DATE AND CONDITIONS FOR APPLICATION OF
MONETARY POLICY UNDER INFLATION TARGET FRAMEWORK
2.1. ACTUAL SITUATION IN REGULATING MONETARY POLICY IN
VIETNAM IN THE PERIOD OF 2005 TO DATE
2.1.1. Economic context of Vietnam in the period of 2005 – 2014
2.1.2. Characteristics on regulating monetary policy in Vietnam in the period of
2005 to date
2.1.2.1. In the period of 2005-2010
Vietnam economic growth rates in 3 years of 2005, 2006 & 2007 has reached the
highest in 10 early years of the 20th century as 8.4%, 8.2% and 8.5% respectively. And in
such 3 years, the monetary policy in Vietnam has focused on controlling inflation target;
however, such target has not been implemented consistently. And also, the economic
growth targets have always been put in parallel. Meanwhile, exchange rate stability target
has been more thoroughly prioritized.
In the period from 2008 to 2010, the economic growth rate of Vietnam has dropped
from more than 8% of 3 previous years, down to an average of 6.06%/year with the
economic context facing numerous obstacles in both nationwide and worldwide.
The biggest difficulty in implementation of monetary policy in this period is to take
tightening while the liquidity credit institutions are not abundant. Inflexible regulation methods
may lead to loss of liquidity in the entire system. Thus, it is impossible to implement monetary
policy in the way of merely tightening in common sense that reducing the cash flow in
circulation, but really being flexible to both lowering interest rates in purpose of reducing
pressure on prices, and controlingcredit growthto ensure the system safety.
2.1.2.2. In the period of 2011- 2014
In the 4-year period from 2008 to 2011, the economic growth rate of Vietnam has
dropped from more than 8% of 3 previous years, down to an average of 6.06%/year with the
economic context facing numerous obstacles in both nationwide and worldwide
Inflation in the period of 2008 - 2011 was very complicated with the permanent risk
of high inflation. The economic downturn associated with inflation risk have made
extremely difficult in choice of monetary policy direction of Vietnam in this period.
Considering the government's directions for implementation of monetary policy in this
period, it’s seen a big and continuous movement indifferent goals in a short time. In order to
achieve such goals, the monetary policy instruments have been applied more and more
flexibly and effectively.
In the period of 2012 - 2014, the domestic economy was affected by the global
economic context with numerous disadvantages, complexities and slow pace of recovery in
general. In addition, difficulties arising from outstanding the domestic economy, such as
pressure on the low absorption capacity of the economy; heavy pressure on bad debts; slow
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consumer of domestic goods and low management capacity and competitiveness of
enterprises ... In such context, the development orientation of such 3-year periodin a high
priority was the stability of macroeconomic. The economic growth ratesin such 3 yearswere
low, but maintaining tends to increase with the growth ratesof 5.03%, 5.42% 5.98 % in
2012, 2013 and 2014 respectively. The growth rate of consumer price index remained stable
over months, with an average growth rate of 0.39% /month. In 2012,the inflation
ratedecreased sharply from 18.52% in 2011 down to 6.81%. In 2013,the inflation rate
remained at 6.6%. By 2014, the yearly inflation rate was only 1.84%, the lowest level in
more thanthe last decade.
In such macroeconomic context, monetary policy regulating target in 3 years was
maintained relatively stable, focusing on inflation control task. Total means of payment
growth rate and credit growth are targeted in a significantly lower level compared with the
previous period. The prolongation of consistency in regulating goals in a period of three
years facilitatedthe monetary policy to promote regulatinginstruments, aiming to stabilize
prices in medium term so as to re-strengthen confidence in the monetary policy.
To accomplish the objective of reducing interest rate, the central bank used both
indirect regulating tools andmeasures of administratively natured measures. In respect of
stabilizing exchange rate, the central bank decided to announce exchange rate stability
target at the beginning of the year with a commitment to exchange rate fluctuations of not
exceeding 2-3% in years of 2012 & 2013, and no more than 1 - 2% in 2014 in order to
create market trust and orientation. Along with that, the central bank used a series of
measures to manage the foreign exchange market, implemented regulations on foreign
currency of credit institutions and applied ceiling lending interest rate in dollars; operation
in accepting deposit and lending foreign currency which was moved to the trading system
helpedthe bank systemraise buying foreign currency from the public. Thus, in the period of
2012 - 2014, the key changes of monetary policy against the previous period were shown in
the following:
Firstly, the price stability target is the top priority and may be seen as the sole
objective of monetary policy during this period
Secondly, the intermediate objective of monetary policy tended to move from
monetary volume (expressed by annually growth rate of total means of payment and credit
growth) to the interest rate target.
Thirdly, messages on monetary policy were frequently and clearly transmitted with a
firm commitmentby the State Bank of Vietnam.
Assessments on regulating Vietnam’s monetary policies in the past years
Achievements
(i) Inflation has been under control, thereby making contribution to stabilizing macroeconomy and supporting for economic growth; (ii) Dollarization has been on downward trend
with steady exchange rate, improved external reserve; (iii) Interbank currency market has put
on stable operation which partially represent a key role in financial system.
Shortcomings in regulation of monetary policies and its causes
The first, short and long term targets of monetary policies have been not consistent
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and specific. Low functions, authorities of State Bank of Vietnam in make and implement
national monetary policies are considered as one of the causes of this reality.
The second, the solidarity among operational target, intermediary target and final
target has been not guaranteed.
The third, the SBV’s control of money supply has shown a number of limits
The fourth, tool of monetary policy regulation has shown an administrative nature.
Pending issues of current monetary policy regulating framework in Vietnam
Vietnam has changed from the multitarget monetary policy framework into single
target monetary policy framework. Nevertheless, targets of monetary policy have been not
defined clearly and shown a lack of consistency in the long run.
Target in regulating monetary policies has been recently successful for a short time
but unsustainable, effect of monetary policy tool is not high due to controlling capability
and relationship among variables is not close and delay in plolicies is prolonged.
The need to renovate methods of regulating monetary policy into inflation
targeting basis framework
Facing limits of Vietnam’s framework of regulating monetary policy, there are some
main issues to be stated, including:
- A target of controlling inflation at a low and stable level should be strongly and
clearly set in the long term for monetary policy to ensure stability of inflation control.
- In the context that variables show a not very strong and stable relationship for final
variables, that is inflation, like present reality in Vietnam, it is very hard to select a
traditional monetary policy framework using volume of money, interest rate or exchange
rate as intermediary variable for monetary policy regulation.
- Control expetation is an important element of inflation variation. In Vietnam, the
strong variations of high inflation had made impresstions which easily change inflation
expectation. Therefore, inflation expectation will play an important role in monetary policy
regulation and gaining the target of controling inflation expectation.
The very issues give recommendation on application of inflation targeting framework
for Vietnam when in reality, target of inflation policy is management policy framwork
straightly focusing on ecnonomy’s inflation target and grealy successful in controlling
inflation expectation. To analyze capability of applying inflation targeting basis in Vietnam, it
is needed to consider and compare conditions to implement framework of inflation targeting
basis which is formed or not, what level is, and capability to ensure those conditions can be
formed or not?
2.2. Assessments on conditions to apply inflation targeting in Vietnam
2.2.1. In terms of independence of the Central Bank
In Vietnam in the aspect of legality as well as reality, it can be seen that the
independence of the SBV is very limited on three aspects, independence in finance, in
personnel and in policies. This partially reduces flexibility in regulating and implementing
national monetary policy, even the cause of delay in policy reaction against measurable
changes in currency – finance market which affect stability of the currency. According to
statistics by the 2010 Law on State Bank, there are up to 15 contents in relation to control of
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monetary policy decided by Prime Minister or Government.
Regarding mechanism for guaranteeing presentation and transparency of the Central Bank.
Currently, Vietnam has not made a legal statement on inflation targeting policy.
However, the Central Bank’s level of commitment and responsibility of presentation have
shown the clear improvement in the recent period. These changes have positive effects for
results of regulating monetary policy in the recent time as well as create a premise for
enhancing implementation of monetary policy in the time ahead.
2.2.2. In terms of healthiness of financial market
Development level of finance – banking in Vietnam has remained relatively low and
unconsistent, undynamic; capital supply and demand has been not reacted, market tool is
very few and not effectively used, thereby restricting the SBV’s ability to regulate currency
by monetary policy tool.
The depth of Vietnamese financial market has well developed but the Vietnam’s
level of improving financial depth over the past time remains unsustainable. During 20092011, Vietnam made a manifest improvement in financial-banking service and financial
approach. The reason for this is the scope of market, such as total of assets of financial
system and of banking system, financial depth, deposits and credit of banking system.
Meanwhile, Vietnam strongly relegated on the aspects of institution, financial market and
non-banking financial service. Stock market is small and much lower than the medium level
of the world.
Regarding healthiness of fiscal policy, the rate of public debt safety is basically in
safety margin in accordance with international norms. Nevertheless, on the basis of analysis
in payment capability in the future for changes of exchange rate as well as placing
happenings of Vietnamese public debt in the context of international economy and domestic
macroeconomic instability, especially prolonged and continuous double deficit, it can be
seen that Vietnamese public debt still has lots of risky elements.
2.2.3. In terms of the Central Bank’s capability
The task of instatistics in Vietnam in general and in banking system in particular, has
been, in recent years, paid attention and clearly improved. Yet, in addition to the above
positive things, database of banking sector remains limits and shortcomings. Input database
of macroconomy, currency and banking operation of the SBV is few and under process of
completion, time is not long enough and not updated with system, especially monthly,
quarterly data, causing difficulty in prejection. It is hard to seek data in Vietnam and data
on Vietnam is not even in the report on global financial stability.
Capability, analyzing quality, projection, especially macro-economy and financial
market are so weak compared to requirement for regulating policies and managing,
supervising currency, banking operation in a proactive, flexible and effective manner. The
current method of projection is simple and not synchronized, model of projection is instable
or deficient in factors affecting projection criteria, framework of analysis and assessment of
policy effects is not completed.
2.2.4. In terms of economic structure
Level of dollarization: Vietnam has made certain achievements during the prevention
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of dollarization in the past years, especially the period from 2012 until now with
considerable results. However, the dollarization still exists in the macro economy in general
and monetary policy regulation in particular, requiring Vietnam to more drastically
implement methods for preventing dollarization, particularly the openness of economy is
increasingly on the rise.
Sensitiveness of exchange rate channel in Vietnam is quite high. Index of foreign trade
openness is still high, that is the constant growth in export turnover during integration stages.
The satisfaction of conditions in effectively applying monetary policy framework in
inflation targeting basis is low. However, the fact in the newly emerging markets – as
analysis in the chapter 1 – shows that this framework is still a selection to consider even
though essential conditions is not satisfied fully. In addition, recent changes of the
economy in general and in banking system in particular, in regulation of macro economy
in general and regulation of monetary policy in particular, it can be seen that trend to form
such conditions is gradually implemented and bring good results. Therefore, performance
of framework of inflation targeting policy is possible under condition that efforts to form
the above necessary conditions need to be strengthened. Furthermore, transition to one
monetary policy mechanism can only attained good achievement if receiving overall
support from other macro policies
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CHAPTER 3
COMPLETING CONDITIONS TO IMPLEMENT MONETARY POLICY UNDER
INFLATION TARGETING FRAMWORK IN VIETNAM
3.1.INTERNATIONAL AND REGIONAL OVERVIEW
3.1.1. Forecasting factors affecting Vietnam banking activities from now to 2020
Several general development trends of the world economy
In the next phase, the world economy will continue to strongly grow in a number of
key trends as follows:
 Peace and cooperation with the aim of mutual development:
 The world and regional economies are in the phase of growth recovery but this
remains slow, uneven and potentially risky. Completing economic and politic benefits
among the countries is increasingly fierce together with increasingly fierce defense.
 Trend of monetary policy easing and domestic demand
 The Asia- Pacific region is becoming the center of economic development in the
world together with strong growth of the emerging economies, especially China and India.
East Asia continues to be a dynamic growth area in recent years.
 Science and technology develop strongly and impressively, which continues to be
a motivation for the development of the world economy. Trends in high technology
applications is growing strongly in all areas of the world.
Trend in the development of the banking system
The trend in the development of the world banking system in the early years of the
20th century can be summarized into four major trends as follows: - Development of
commercial bank activities with the aim of supplying traditional services; - Development of
the investment banking activities; - Development of a multi-function banking model; Development of cross-border banking activities.
3.1.2. Domestic overview
The economy is in the rhythm of growth, inflation has been maintained at a low
level but is not really sustainable, the exchange rate tends to stabilize; The liquidity of
commercial banks has been improved, but has not been really sustainable; budget
deficits and public debts tends to increase, which results into great pressure on
macroeconomic stability and the banking sector; Financial liberalization and opening up
of financial markets
3.2. PERPECTIVE AND ORIENTATION OF IMPLMENTING ADMINISTRATION
MECHANISM OF MONETARY POLICY UNDER INFLATION TARGETING
FRAMEWORK IN VIETNAM
3.2.1. Perspective
There have been many innovations in perspectives of the Party and the Government
in recent years for recognizing the relationship between growth and inflation - we can not
grow in any case, anti-inflation requires a lot of exchanges. The Decree No 11 of the
Government has confirmed to control the inflation, stabilize the macro-economy as a
priority objective in 2011 and 2012. This innovation has created necessary and integral
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prerequisites to support the application of monetary policy under the inflation targeting
framework in the State Bank.
The program of restructuring the overall economy, which focuses on three critical
sectors as public investment, financial markets and restructuring of State-owned businesses
- which the 3rd Central Conference in 11th session (2011) identified as a key task of the
next five years is being implemented drastically. On that basis, the banking sector has also
developed a proposalfor restructuring the system of credit institutes in the phase of 2011 and
2015 with the aim of developing an effective, comprehensive, consistent and sustainable
financial system. This program is expected to open a new phase for the development of the
financial system.
3.2.2. Orientation
Promoting the role of monetary policy in controlling the inflation, stabilizing the
currency value amd puttingcurrency market in proper operation in accordance with
international and Vietnam practices will be one of the key tasks. To accomplish this objective, it
is necessary to gradually change the operating framework of monetary policy under the market
mechanism and international practices in conformity with practical conditions of thecurrency
market and the credit institute system of Vietnam. In particular, the ultimate objective is to
control consumer price index at an annual rate in conformity with the mid-term objective, the
implementation of measures to support economic growth will not affect the objective of
inflation control. The process of conversion into implementing the monetary policy under
inflation targeting framework will be carried out step by step, the fundamentals will be
prepared, while the objective of monetary policy in each year will be also guaranteed. In
particular, it is possible to divide into the following phases:
- In the phase of 2014 and 2015, continuing to control amount of money and interest
rate; monetary indicators such as M2 growth and credit growth continues to be developed as
market-oriented indicators to enhance efficiency and transparency of monetary policy
operating; With the aim of controllling interest rate, the interbank interest rate is focused on
to regulate interest rate and specific loan.
- In the phase of 2016 and 2020, the framework of oriented monetary policy mainly
operates under the interest rate and operating under the volume is limited comparing to the
phase of 2014 and 2015 to control completely under the Price in 2020 and operate monetary
policy under the objective of inflation control.
At the same time, it is neccessary to establish a model for evaluating the mechanism
of monetary policy transmission to the operational, intermediate and final objectives.
Combining synchronized monetary policy tolos, regulating primarily through open market
service channels and the interest rate channel, considering cancellation of net mechanism of
interest rate and loans in VND at the appropriate time to help the currency market reflect the
demand and supply as important steps to strive in the phase of 2016 and 2020, monetary
policy instruments are mostly indirect instruments. Besides, it is necessary to develop
mechanism for controlling cash flow in the economy, develop and implement the
mechanism of the coordination between monetary policy and macro policies. Analysis and
forecast should be enhanced.
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3.3. SOLUTIONS FORCOMPLETING CONDITIONS TO IMPLEMENT MONETARY
POLICY UNDER INFLATION TARGETING FRAMWORK IN VIETNAM
3.3.1. Solutions for enhancing the independence, commitment and accountability of the
State Bank
3.3.1.1. Enhancing the independence of the State Bank in operating the monetary policy
3.3.1.2. Enhancing accountability and transparency of policy information
3.3.2. Solutions for strengthening trust and understanding of the public on the
monetary policy of the State Bank
3.3.3. Solutions for enhancing the quality of statistic dataand inflation analysis and
forecast capacity
3.3.3.1. For the quality of statistic data
3.3.3.2. For inflation analysis and forecast capacity
3.3.3.3. Completing the legal basis for the forecast
3.3.3.4. Forecast contents
3.3.3.5.Developing and completing forecasting methods and instruments
3.3.3.6.Developing information technology and database system for analysis and forecast
3.3.3.7.Developing analysis and forecast personnel
3.3.3.8. Enhancing combination among units, agencies and organization in forecast
3.3.4. Solution for developing and establishing a stable financial system and developed
financial market
3.3.4.1. Enhancing flexibility and efficiency of monetary policy
3.3.4.2.Creating the necessary conditions to implement a flexible exchange rate
mechanism
3.3.4.3. Enhancing the competitiveness of the commercial banks in particular and
Vietnam's banking system in general
3.3.4.4. Developing bond market
3.3.4.5. Enhancing access to bank loans by enterprises, especially small and medium
enterprises
3.3.3.6. Strengthening fiscal policy
3.3.5. The process of completing conditions to implement monetary policy under
inflation targeting framework in Vietnam
Phase I: 2015-2017
-Top priority objective or final objective of monetary policy is to stabilize currency value.
- Independence in the development and implementation of monetary policy as well as
enhancement of the power of the State management over currency for the State Bank to
have sufficient strength and ability for regulating the monetary transmission channel,
particularly the monetary supply and withdrawal channels.
- Gradually enhancing and enhance effectiveness of interest rate instrument in
operating monetary policy, creating the environment forthe operating interest rate toget a
real impact on interest rate on the marketin conformity with the trend of integration and
operating mechanism of monetary policy in accordance with inflation targeting.
- Coordinating with General Statistics Office of Vietnam, International Monetary
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Fund (IMF) to research and agree on a basic inflation estimate method in conformity with
international standards and conditions of Vietnam.
- Developing and completing forecasting models for inflation and core inflation for
operating monetary policy as well as the periodic inflation reports published to the public;
Researching and completing models for monetary transmission mechanism under
quantitative methods and applications in operating monetary policy.
- Continuing to implement the restructuring of the credit institute system with the
aim of enhancing capacity of risk management and executive management skills and
modernize the infrastructure of the credit institutes.
- Enhancing the inspection and supervision capacity of the State Bank, especially
remote supervision, and thenadopting the international standards in inspection and
supervision.
- Preventing dollarization and gradually eliminating the status of foreign currency
transactions in the economy.
Phase II: 2018-2020
- Enhancing the transparency of monetary policy operating at the State Bank, in order
to gradually adopt inflation targeting mechanism in Vietnam;
- Publicizing the monetary policy operating as well asstrategy in operating monetary
policy in Vietnam and publish inflation reports and publications;
- Implement measures to narrow the expenses as well as improving the spending
efficiency of the Government and maintaining the budget deficit at the level of 3-5% of GDP.
- Developing the principles of fiscal policy does not affect monetary policy.
Phase III: From 2020
- Offering appropriate inflation targeting beneficial for the economy in the medium
term (about 5 years) in the period of 2020 and 2025.
- This index is maintained constant in each year within medium-term period of 5
years, or 2-3 years.
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CONCLUSION
With five questions as given in the objectives of the thesis as presented in the
Preamble, it is believed that the thesis has basically solved the given affairs. With 3
chapters,the thesis gives a brief theoretical summary of the monetary policy of inflation
targeting to operating practices of monetary policy in the last 10 years to suggest adopting
monetary policy under theinflation targetingframework for Vietnam and also offer solutions
for completing conditions so that Vietnam implement such policy framework and the main
results of the thesis are summaried as follows:
In theory, the Thesis systemizes a comprehensive theoretical basis of monetary
policy, the monetary policy of inflation targeting, which focuses on analyzing the
advantages and disadvantages of the monetary policy framework in depth in order to show
the advantages of inflation targeting monetary policy; analyzing the prerequisites to adopt
inflation targeting monetary policy; trends and experiences of the countries in the world
which have adopted this policy and lessons for Vietnam.
In practice, the Thesis has summarized the economic situation changes in Vietnam
from 2005 to now, with the division into milestones to be able to clearly assess inflation
developments, economic growth as well as how to operate monetary policy in each phase.
Thereby offering four basic limitations of monetary policy in the last phase, which are (i)
monetary policy has not determined short-term and long-term objectivesclearly and
consistently; (ii) monetary policy has not really guarantee consistency among
operational,intermédiate and final objectives; (iii) the control of cash flow of the State Bank
is limited a lot; (iv) the monetary policy operating instruments of the State Bank is still on
administration. Through such restrictions, the thesis also outlines two points in the operating
framework of monetary policy which are (i) Vietnam has moved from a multi-objective
monetary policy framework into the single objective monetary policy framework, but the
objective of monetary policy is determined unclearly and inconsistently in the long time; (ii)
the objective of monetary policy operating has been attained in a recent short period but
remains unstable, effectiveness of monetary policy instruments are not high because the
ability to control and the relationship between variables remain unclear.
With the limitations and difficulties together with growing pressure of the banking
system with a key role including controlling inflation, stabilizing the monetary system for
the period from now to 2020 and towards 2030, the innovation of monetary policy is to
enhance the efficiency and effectiveness of monetary policy instruments to achieve the
objectives as offerred, which is really urgent. Compared with the conditions, the thesis has
reviewed and determined the position of Vietnam in meeting the conditions to be able to
apply the monetary policy under inflation targeting framework and also believed that
Vietnam could fully adopt the this policy and what Vietnam is currently implementing is
also going on the "way" for completing the condition for implementing monetary policy
under inflation targeting framework.
Concerning policies in comparison with Vietnam’s factual situation, the Thesis
theoretically recommends four groups of solutions in correspondence with Vietnam’s gaps
in regard to prerequisites of ITMP realization. The recommendations aim to enable Vietnam
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to shift to ITMP in sequence with consolidated foundations, insuring annual MP targets,
which are divided in accordance with periods. The first period refers to curb on rate, which
focuses on inter-banking rate moderation in order to manage lending and borrowing rate;
the next period is attributed to primarily rate-oriented management, decreasing quantityoriented management, towards the management basing on price and inflation stabilisation.
With the results as mentioned above, the Thesis has solved the objectives set out in
the research process. However, inflation control and monetary policy are a "timeless story"
set out in each phase, with the complicated and unpredictable developments, at the next time
it is still necessary to researchcharacteristics exploited in many different aspects in order to
search and completethe appropriate framework of monetary policy operating for Vietnam.