MONETARY AND FINANCIAL THEORIES 2 topic relationship between monetary policy and fiscal policy from theories to reality in vietnam

NATIONAL ECO NOMICS UNIVERSITY ADVANCED EDUCATION PROGRAMS --- MONETARY AND FINANCIAL THEORIES 2 Topic: Relationship between monetary policy and fiscal policy: From theories to reali

NATIONAL ECO NOMICS UNIVERSITY

ADVANCED EDUCATION PROGRAMS

-

MONETARY AND FINANCIAL THEORIES 2

Topic: Relationship between monetary policy and fiscal policy:

From theories to reality in Vietnam

Group: A Class: Corporate Finance AEP 61A Teacher: Pham Thi Thuy Dung

Ha Noi, 2021

1

GROUP MEMBERS AND TASKS

Full name Tasks receipt

Group Assessment

1 Khổng hị T Kim Liên

(11192723)

Leader _ Information Collecting Part 2 +

Slide making 100%

2 Nguyễn Thanh Huyền

(11192468) Information Collecting Part 1 + Presenter 100%

6 Nguyễn Thu Trang

(11195370) Information Collecting Part 1 + Presenter 100%

2

TABLE OF CONTENTS

GROUP MEMBERS AND TASKS 1

INTRODUCTION 3

I OVERVIEW OF MONETARY POLICY AND FISCAL POL ICY 4

1.1 MONETARY POLICY 4

1.2 FISCAL POLICY 7

II RELATIONSHIP BETWEEN MONETARY POLICY AND 10

FISCAL POLICY 10

2.1 COORDINATION OF MONETARY POLICY AND FISCAL POLICY 10

2.2 THE INTERACTION RELATIONSHIP BETWEEN MONETARY AND FISCAL POLICY IN THE IMPLEMENTATION OF MACROECONOMIC OBJECTIVES 10

2.3 THE IMPACT OF FISCAL POLICY ON MONETARY POLICY 12

2.4 THE IMPACT OF MONETARY POLICY ON FISCAL POLICY 14

III RELATIONSHIP BETWEEN MONETARY POLICY AND FISCAL POLICY IN VIETNAM DURING COVID-19 PANDEMIC 14

3.1 FINANCIAL MARKER IN SITUATION IN THE CONTEXT OF 14

COVID-19 14

3.2 WHAT THE GOVERNM ENT HAS DONE TO ACHIEVE POSITIVE RESULTS 16

3.3 GENERAL EVALUATION AND OBJECTIVES OF MONETARY AND FISCAL POLICY IN VIETNAM DURING COVID -19 PANDEMIC 17

CONCLUSION 20

REFERENCES 21

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INTRODUCTION

Along with international financial integration, the abnormal fluctuations in the financial market also become more and more complicated, the potential risks in the financial market therefore also become unpredictable, requiring countries to increase control over financial markets Controlling the financial market can be through the creation of a strict legal framework to prevent negative impacts from the unexpected behavior of actors in the financial market macro-policy tools to control financial transactions and forecast negative trends in the future to have appropriate hedging solutions

The subject of this article is mainly about: “Relationship between monetary policy and fiscal policy: From theories to reality in Vietnam” We focus on studying the relationship

of fiscal policy and monetary policy and analysing their functions in controlling the safety

of financial markets and policy recommendations for Vietnam, especially during Covid –

19 pandemic

to the nation's banks, its consumers, and its businesses

The goal is to keep the economy humming along at a rate that is neither too hot nor too cold The central bank may force up interest rates on borrowing in order to discourage spending or force down interest rates to inspire more borrowing and spending

The main weapon at its disposal is the nation's money The central bank sets the rates it charges to loan money to the nation's banks When it raises or lowers its rates, all financial institutions tweak the rates they charge all of their customers, from big businesses borrowing for major projects to home buyers applying for mortgages

All of those customers are rate-sensitive They're more likely to borrow when rates are low and put off borrowing when rates are high

1.1.1 Types of Monetary Policy

Broadly speaking, monetary policies can be categorized as either expansionary or contractionary:

(i) Expansionary Monetary Policy

In macroeconomics, expansionary monetary policy is used when the central bank injects money into the market, expands the money supply more than usual which causes interest rates to fall, thereby increasing spending demand, creating more jobs, doing more to meet the quantity of goods, leading to the promotion of financial investment and expansion of production and business

3 ways for central banks to conduct expansionary monetary policy:

Lower the reserve requirement ratio;

(ii) Contractionary Monetary Policy

In macroeconomics, tight monetary policy will be the opposite of expansion, which is the move of the central bank to reduce the money supply in the market, leading to an increase in bank interest rates, thereby narrowing the demand for money, spending and commodity prices fall

Contractionary monetary policy is used by the government when the economy is overheated, inflation is increasing and used to fight inflation

3 ways central banks implement contractionary monetary policy:

Increase the required reserve ratio;

Increase discount rates, control credit activities;

Sell securities

Based on the economic situation of a country that is growing excessively or slowly; inflation is high or under control; unemployment rate; good or bad credit; market liquidity…then the government will choose to use tight or contractionary monetary policy

1.1.2 Roles of Monetary Policy

In macroeconomics, monetary policy plays a very important role in regulating the amount of money circulating in the market Thanks to monetary policy, the central bank can control a country's currency; effective support in controlling inflation, stabilizing the purchasing power of the market and promoting economic growth More specific:

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Economic growth is the first and most important goal when implementing monetary policy in each country In particular, the two main factors that represent the economic growth of a country are expressed through two factors, namely Interest Rate and General Demand because these two indicators are the biggest factors affecting the increase in investment, production, and gross national product

When applying the monetary policy, it will directly affect the effective use of social resources, the scale of production and business, and the creation or reduction of jobs That

is, to reduce the unemployment rate, the economy must accept a certain rate of inflation

(iii) Stable price in the market

Stabilizing prices in the market helps the government to plan the most sustainable economic development policy because it has eliminated the fluctuation of prices The balance between the amount of money and the quantity of goods will help stabilize prices, thereby creating a less volatile investment environment, attracting investment capital, promoting domestic and foreign enterprises to produce and bring profits to the market

When the main interest rate (also known as the prime interest rate) is stable, credit interest rates from commercial banks will also be less volatile As a result, lending and investment funds created from deposits in the society will have a more flexible interest rate system in line with market fluctuations

Monetary policy has a great role in stabilizing financial markets, so that the government can make more accurate decisions in promoting economic growth The stable foreign exchange market will contribute to strengthening the confidence of foreign companies because the exchange rate policy is the first condition for these organizations to decide to invest in a certain country

1.1.3 T ools to implement Monetary P olicy

Central banks use a number of tools to shape and implement monetary policy:

First is the buying and selling of short-term bonds on the open market using newly created bank reserves This is known as open market operations Open market operations target short term interest rates such as the federal funds rate The central bank adds money -

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into the banking system by buying assets—or removes it by selling assets and banks —respond by loaning the money more easily at lower rates or more dearly, at higher rates— —until the central bank's interest rate target is met Open market operations can also target specific increases in the money supply to get banks to loan funds more easily by purchasing

a specified quantity of assets This is the process known as quantitative easing (QE)

The second option is to change the interest rates or the required collateral that the central bank demands for emergency direct loans to banks in its role as lender- -of last-resort In the U.S This rate is known as the discount rate Banks will loan more freely or less freely depending on this interest rate

Authorities also can manipulate the reserve requirements These are the funds that banks must retain as a proportion of the deposits made by their customers in order to ensure that they are able to meet their liabilities Lowering this reserve requirement releases more capital for the banks to offer loans or to buy other assets Increasing it curtails bank lending and slows growth

Unconventional monetary policy has also gained popularity in recent times During periods of extreme economic turmoil, such as the financial crisis of 2008, the U.S Fed loaded its balance sheet with trillions of dollars in treasury notes and mortgage-backed security (MBS), introducing new lending and asset-purchase programs that combined aspects of discount lending, open market operations, and QE Monetary authorities of other leading economies across the globe followed suit

Central banks have a powerful tool in their ability to shape market expectations by their public announcements about possible future policies Central bank statements and policy announcements move markets, and investors who guess right about what the central banks will do can profit handsomely

1.2.1 Definition

Fiscal policy refers to the use of government spending and tax policies to influence economic conditions, especially macroeconomic conditions, including aggregate demand for goods and services, employment, inflation, and economic growth

Fiscal policy is often contrasted with monetary policy, which is enacted by central bankers and not elected government officials

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1.2.2 Roles of Fis cal Policy

The fiscal policy ensures an attractive price level in a country Consequently, this implies that the costs and prices reach a level where employment and production are maximized

When expenditures of non-productive projects are lowered, or taxes are raised, the demand for goods and services decreases As a result, fiscal policy acts as a significant inflation rate control alternative

(iii) Encouraging Investments

Providing a conducive environment for businesses and consumers, for instance, by reducing taxes, encourages investments This moves capital from less productive to more

productive sectors, consequently enabling a country’s resources to be fully utilized

In most emerging economies, some provinces or states experience more development than others It is, therefore, the responsibility of the government to initiate the infrastructural development of the underdeveloped areas Also, the government might provide less developed areas with tax breaks to boost the per capita income

Fiscal policy can influence certain sectors of the economy in direct or indirect ways For example, some policies have a direct impact on the value of land in the agricultural sector Also, the agricultural sector is very capital-intensive A good fiscal policy can affect the relative demand and competitiveness of exports for agricultural products Therefore, fiscal policy can be used to increase the output of some sectors of the economy

A country cannot improve its economic position without increasing investments If the consumption rate rises too rapidly, then savings and investments automatically drop Therefore, the fiscal policy comes in and plays a supervisory role over the consumption rate

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The purchasing power increases with a fair distribution of resources among different classes of society This leads to high levels of production, which lowers the unemployment level

1.2.3 Tools to implement Fiscal P olicy

The government possesses two major fiscal tools for influencing the economy These tools can be divided into spending tools and revenue tools Spending tools refer to the overall government spending On the other hand, revenue tools refer to taxes collected by the government

Capital Expenditure

Capital expenditure refers to what a government spends on amenities such as schools, roads, and hospitals This spending adds to a country’s capital stock Besides, it affects the productivity of a country Moreover, as the government increases its spending on such facilities, it increases the capital stock of the country Since such facilities highly encourage investment, the total productivity of a country also increases due to an increase in investments

Current Government Spending

Current government spending includes goods and services, which it regularly provides Such services include defense, health, and education This expenditure aims at improving

a country’s labor productivity

Transfer Payments

Transfer payments are payments that the government makes through the social security systems Transfer payments ensure a minimum level of income for low-income individuals Also, they provide ways in which the government can change the distribution of income in society Therefore, they comprise unemployment and child benefits Such benefits also include state pensions, housing benefits, income support, and tax credits It should be stated that such payments are not included in the calculation of the GDP because they are not attached to any factor of production

Indirect Taxes

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Indirect taxes refer to taxes imposed on specific goods such as cigarettes, alcohol, fuel and services VAT is an example of an indirect tax Health and education can be excluded from indirect taxes

Direct Taxes

Levies on profit, income, and wealth are direct taxes Taxes charged on deceased property can both raise revenue and distribute wealth They include capital gains taxes, national insurance taxes, and other corporate taxes

II RELATIONSHIP BETWEEN MONETARY POLICY AND

of these two policies will help the executive government achieve two important macroeconomic objectives: growth and inflation control

On the contrary, in-rhythmic, non-cohesive coordination will reduce policygoverning effectiveness and may even exacerbate macroeconomic instability Therefore, finding a mechanism for coordination between these two policies is always of interest to the government and policy makers

MONETARY AND FISCAL POLICY IN THE

IMPLEMENTATION OF MACROECONOMIC OBJECTIVES

Fiscal policy in the implementation of macroeconomic objectives Although each policy, whether monetary policy and fiscal policy, uses a system of different tools: fiscal policyuses tax instruments, budget spending and government borrowing; monetary policy uses a market based - indirect tool system, but in the end both policies aim to achieve the following macro goals:

2.2.1 Development financial market

Both finance ministries and central banks have a strong interest in financial market development because (1) it is indispensable for economic development and growth; (2) it