INTRODUCTION
RELEVANCE AND BACKGROUND OF STUDY
The restructuring of state-owned commercial banks (SOCBs) and the establishment of joint stock banks (JSBs) began during Vietnam's financial reform in the early 1990s This led to a significant deepening of Vietnam's financial system, with the monetization ratio (M2 to GDP) rising from 25% in the mid-1990s to over 70% by 2004 In that year, SOCBs accounted for 73% of total credit, highlighting their dominant role in the credit market The financial system became increasingly segmented, with JSBs and smaller banks primarily providing credit to the private sector, while SOCBs offered loans to both the private and public sectors.
Vietnam's entry into the World Trade Organization (WTO) catalyzed a significant influx of foreign direct investment and portfolio inflows, marking a pivotal moment in the country's globalization journey However, this rapid economic integration has also brought substantial challenges, particularly an unfavorable balance of payments Since 2000, Vietnam's financial sector has experienced explosive growth, especially during the 2007-2008 period, leading to an overheated credit market that surged by approximately 50% in January 2008 This growth contributed to rising inflation, which reached 14% at that time (Ishii, 2008) By March 2011, inflation accelerated to 13.89%, the highest rate in 25 months, while the trade gap widened to $1.15 billion, up from $1.11 billion in February (S&P Reporting, 2011).
PROBLEM STATEMENT
Most economic models simplify the relationship between financial conditions and economic changes by focusing on a limited set of financial variables, such as short-term risk-free interest rates and long-term government bond rates (Hall, 2001).
As financial systems have advanced significantly in recent years, their influence on the economy has become more extensive and profound This complexity makes it challenging to identify the root causes of economic issues, as certain variables may remain unrecognized A notable example is the 2008 global financial crisis, which originated from the credit sector, particularly the mortgage asset crisis in the U.S., as well as the capital flight from the Vietnamese securities market due to prior years' accommodative monetary policies.
Historically, economists like Pintinkin, Gurley, and Shaw highlighted the crucial role of financial intermediaries and credit markets Modigliani and Papademos (1977) acknowledged that traditional monetary theory overlooked the functions of these intermediaries and bank credit Research by Gurley and Shaw (1956) indicated that financial intermediaries have a greater impact on credit supply than on money supply Consequently, the credit channel plays a significant role in influencing policymakers' decisions.
Understanding the role of the credit channel in the financial market is essential for policymakers It is important to grasp how monetary policy is transmitted through this channel, as identifying its role in monetary transmission is crucial for improving current policies This understanding ultimately contributes to achieving national economic objectives.
This study aims to identify the role of credit channel in Vietnam's monetary transmission mechanism, specify 1996-2010 period Following the main objective, the thesis:
To analyze whether past value of credit helps predict the money supply;
To examine the impact of credit shocks on money supply, also other macro economies;
To test whether credit shock plays important role in forecasting the error of money supply.
RESEARCH QUESTION
To obtain the above objectives, this thesis will attempt to answer the following questions:
What is the role of credit channel in the monetary policy transmission in Vietnam case over the period 1996-2010?
Does the past value of credit help predict money supply?
How does money supply reaction to credit shock?
Whether credit shocks plays important role in forecasting money supply's error?
To carry out above objectives, this study uses quarterly data from 1996:Ql to 2010:
Q3 Econometric techniques and descriptive statistic will be employed as primary quantitative in this research
Descriptive statistical analysis provides a comprehensive overview of all variables utilized in this thesis, including the distribution, variation, and central tendency of both original and modified data This analysis allows for a preliminary assessment of the quality of the data employed.
This article employs vector autoregression (VAR) techniques to analyze time series data and address key research questions To validate the t-test and F-test, a unit root test is conducted to assess the stationarity of all variables The optimal lag lengths for the VAR model are determined using various criteria to ensure the best model fit The Granger causality test is utilized to investigate whether past values of credit can effectively forecast money supply Additionally, impulse responses and variance decompositions are applied to explore the remaining sub-questions The empirical results provide insights into the role of the credit channel in monetary transmission within the context of Vietnam.
STRUCTURE OF THESIS
The study is organized as following:
Chapter 1 introduces the importance of thesis, relevance and back ground of study, the objectives and research questions And the methodology is presented as briefly in this part
Chapter 2 demonstrates the literature review Firstly, credit channel theory is mentioned as a core of study Secondly, empirical studies about the role of credit channel in monetary policy transmission are presented In addition, the chapter gives overview the Vietnam's monetary policy framework, in which focuses on the credit market tot nghiep down load thyj uyi pl aluan van full moi nhat z z vbhtj mk gmail.com Luan van retey thac si cdeg jg hg
Chapter 3 presents analytical framework, then develop the model which helps us answer key question Finally, data description as well as steps of economic techniques will be mentioned in this chapter
Chapter 4 shows the empirical results and discussion Finally, results comparison is also presented in this part
Chapter 5 give conclusion, suggests some practical policy implications, and discusses the limitations and direction for further studies.
LITERATURE REVIEW
CREDIT CHANNEL THEORY
Credit channel theory highlights the presence of an external finance premium, often stemming from the principal-agent problem between lenders and borrowers Bernanke and Gertler (1995) elaborated on this concept by identifying two key linkages: the bank lending channel and the balance-sheet channel This thesis will explore these two linkages that are pertinent to credit channel theory.
The bank lending channel: concentrates the variability of loan supply through deposit institutions caused by the effect of monetary policy actions
Banks, that remain dominant information sources in the economy, so that, can overcoming asymmetric information problems and other fictions in credit markets
Many borrowers, particularly small and medium-sized enterprises, rely on bank credit As long as this reliance persists, the role of bank lending in the transmission of monetary policy remains significant.
When the government implements an expansionary monetary policy, it leads to an increase in bank deposits and reserves This, in turn, boosts the availability of bank loans, resulting in higher investment levels and ultimately driving an increase in overall output.
Conversely, tightening monetary policy is synonymous with reducing bank reserves or customer deposits, which leads to a decreased of quantity of bank loans available
To optimize investment spending, it is essential to anticipate a subsequent decrease in output.
Another side of credit view, when we mention to the impact of monetary policy to enterprises, small firms suffer bad effects on expenditure than large firms (Mishkin,
In 1996, it was observed that small companies are more reliant on bank loans, while larger companies have the advantage of accessing substantial capital through stock and bond markets, reducing their dependence on traditional banking channels.
Balance sheet channels: focuses influence of monetary policy changing on borrower's balance sheets and income statement
Fluctuations in monetary policy can significantly impact a company's balance sheet, leading to increased adverse selection and moral hazard issues when granting loans Borrowers with lower collateral face a heightened risk of moral hazard, particularly if they seek loans Companies with declining equity are more likely to pursue risky projects, which raises the likelihood of defaulting on loans, potentially resulting in bank failures and reduced lending and investment In response to declining net worth, banks often require more collateral from borrowers, exacerbating adverse selection problems and further constraining investment funding.
Here is several ways which monetary policy acts upon on firm's balance sheet:
Expansionary monetary policy contributes to an increase in equity stakes by reducing adverse selection and moral hazard issues This leads to a higher firm valuation and greater access to capital for investment, ultimately boosting aggregate demand.
In other way, lower interest rates by the reason of expansionary monetary policy also cause the firm's balance sheet reformation because of the effect of cash flow
Therefore, adverse selection and moral hazard problems can be lessened As a result, capital available for loan will increase, investment spending growth, aggregate output increment finally
Monetary expansion leads to an unexpected increase in price levels, boosting the net worth of companies while reducing issues related to adverse selection and moral hazard This process stimulates higher investment spending and enhances overall aggregate output.
Contractionary monetary policy leads to a decrease in equity prices and cash flow, resulting in a lower net worth for businesses This decline is exacerbated by increased adverse selection and moral hazard issues, which ultimately reduce financing for investment and consumption.
MONETARY POLICY FRAMEWORK OF VIETNAM
The State Bank of Vietnam (SBV) serves as the central bank and a government body of the Socialist Republic of Vietnam, as outlined in the "Law on the State Bank of Vietnam." The National Assembly and the government are tasked with making decisions and supervising monetary policy, while the government prepares plans that include annual inflation projections and determines liquidity levels for the economy The SBV is responsible for implementing the monetary policy set by the government, managing state monetary and banking activities, and acting as the currency issuer, bank for credit institutions, and government bank These functions aim to stabilize currency value, preserve banking operations, and align with the country's socialist economic growth objectives.
According to SBV Law, the State Bank of Vietnam (SBV) functions as a governmental entity, with the National Assembly significantly influencing monetary policy decisions The government's strong intervention, along with the National Assembly's role, highlights the limited independence of the SBV in implementing monetary policy (Camen, 2006).
2.2.2 MONETARY POLICY STRATEGY AND INSTRUMENTS
Vietnam's monetary policy strategy is derived from the five-year Social and Economic Development Plan, with the government responsible for creating an actionable implementation plan This plan includes specific targets for liquidity injection into the economy, as well as key metrics such as M2, credit, and deposits, which are essential components of the government's strategy (Camen, 2006).
The State Bank of Vietnam (SBV) sets annual targets for total liquidity and credit in the economy, aligning with macroeconomic and monetary objectives Each year, the SBV prepares a report detailing the implementation of monetary policy and the outlook for the following year, which is then submitted to the government for consideration and approval Subsequently, the government presents this report to the National Assembly for final approval, following consultations with the National Monetary Policy Advisory Board.
Regarding to monetary instruments, a number of indirect tools have been introduced include reserve requirement, refinancing, discount financing facilities, open market operation and foreign exchange interventions
SBV has applied reserve requirement in various forms since 1990s This instrument proves its important role on money market regulating in past Currently, required
The National Monetary Policy Advisory Board (NMPAD) comprises the Governor of the State Bank, the Minister of Finance, and various experts Reserves are categorized based on deposit maturity, the bank's sectoral focus, and the type of currency deposits, whether domestic or foreign Deposits with maturities of less than a year typically yield higher returns than those exceeding a year, and banks receive interest subsidies when providing credit to the agricultural sector or the People's Credit Fund (Camen, 2006).
In 2008, the reserve requirement was utilized as a key strategy to control inflation amid significant domestic and international economic fluctuations In February of that year, the State Bank of Vietnam (SBV) increased the reserve requirement ratio by 1 percentage point for both local and foreign currency deposits across most credit institutions However, to mitigate the risk of an economic downturn, the SBV subsequently reduced the required reserve for VND deposits under 12 months twice in 2009, lowering it from 6% to 5% and then to 3% Notably, the Vietnam Bank for Agriculture and Development further decreased its rate from 3% to 2% and then to 1%.
In 2010 year, SBV continued to keep reserve requirement ratio at low level; in specific;
3%, 1% for VND deposit below and more than 12 months respectively For foreign currency, SBV also adjusted down to help credit institution increase foreign currency funding (SBV, 201 0)
Since July 2000, the State Bank has utilized Open Market Operations (OMOs) as a crucial monetary tool for managing liquidity This instrument has proven to be the most significant for stabilizing the money market, as it is flexibly aligned with other monetary policy measures In the first seven months of 2008, the State Bank issued compulsory bills with increased base interest rates, specifically raising the annual rates for 182-day and 364-day bills to 7.5% and 7.75%, respectively, to control inflation In the first half of 2009, the State Bank also offered to purchase 14-day maturity securities, providing short-term capital to support credit institutions in meeting their funding needs for economic stimulus programs.
In 2009, the State Bank of Vietnam (SBV) attempted to take action, but it was unsuccessful due to low demand for funds and an excess of financial resources at that time To support credit institutions during the first nine months of 2010, the SBV conducted open market operations (OMOs) by purchasing valuable papers However, by the end of the third month of 2010, rising inflation pressures led to increased interest rates for these papers.
The State Bank of Vietnam (SBV) employs refinancing and rediscount facilities as key components of its discount policy, with both rates serving similar purposes The rediscount rate, determined by the SBV, is based on collateral such as drafts, promissory notes, and bonds, allowing commercial banks to access funds In contrast, the refinancing rate is linked to the loans provided to commercial banks, which use these loans as collateral for SBV funding Consequently, the refinancing rate is typically higher than the rediscount rate In 2010, the SBV utilized the refinancing rate to enhance short-term lending and liquidity for credit institutions, primarily offering 1 to 2-month refinancing to support economic liquidity Additionally, towards the end of 2010, the SBV implemented refinancing measures to address the increased demand for deposit withdrawals from economic organizations and individuals during the Lunar New Year.
Historically, Vietnam's financial system was primarily served by the State Bank of Vietnam (SBV) and two state-owned commercial banks (SOCBs) In 1988, following the Doi Moi reforms, the SBV was established as an independent central bank focused on monetary policy and financial supervision The next phase of financial reform saw the emergence of joint-stock banks.
In 1991 and 1992, Vietnam saw the establishment of commercial and foreign banks, respectively To support financial policies, the Development Assistance Fund was created in 2000 Historically, Vietnam's financial market has been closely linked to non-commercial lending, with the agriculture sector playing a dominant role, as highlighted in a World Bank report from 2006.
According to the World Bank's 2006 report on Vietnam's capital market, the banking sector has experienced rapid growth, primarily through loan provision to the private sector State-owned commercial banks (SOCBs) continue to play a dominant role in credit allocation within the economy However, despite ongoing sector reforms, the banking sector remains financially vulnerable and needs strengthening to improve its stability and lending capabilities.
Table 2.1: One decade and Vietnam's credit
Credit to Economy (growth rate) 23% 25% 32% 39% 35% 23% 50% 28% 45%
Source: Calculated from IMF-IFS and GSO data
In the banking sector credit, credit to the economy rose from VND 155 trillion in 2000
In 2010, Vietnam's credit supply surged to VND 2,690 trillion, representing 136 percent of its GDP, marking a remarkable increase of seventeen times over just a decade Notably, credit growth accelerated dramatically after late 2007, reaching 50 percent This rapid expansion can be attributed to significant capital inflows and the emergence of real estate price bubbles, which served as collateral for loans.
1,981 136% tot nghiep down load thyj uyi pl aluan van full moi nhat z z vbhtj mk gmail.com Luan van retey thac si cdeg jg hg
Vietnam's credit growth 2011 and orientation in 2012
In 2010, Vietnam's banking system experienced a total outstanding loan growth of only 10.9 percent, marking the lowest credit growth rate in a decade, significantly below the targeted range of 15-17 percent set for 2011 Additionally, deposit growth was recorded at 8.89 percent, while the money supply expanded by an estimated 9.27 percent, according to the latest monthly report from the State Bank of Vietnam (SBV).
Vietnam aims for a credit growth of 15-17 percent and a 14-16 percent increase in the money supply this year, as reported by Reuters News (2012) The Central Bank will implement monetary policy to achieve these targets Nguyen Van Binh, the Governor of the State Bank of Vietnam (SBV), indicated in December that lending growth may remain below 15 percent The SBV is committed to promoting the development of agriculture, rural sectors, export goods production, auxiliary industries, and supporting small and medium-sized enterprises, according to Baomoi News (2011).
EMPIRICAL LITERATURE
Recent empirical studies have increasingly focused on the role of credit in the transmission of monetary policy The issue was initially addressed by Bernanke and Blinder (1988) in their influential paper "Credit, Money and Aggregate Demand." They utilized the IS/LM model as a straightforward tool to assess the impact of money demand shocks and introduced the CC (commodities and credit) curve, which resembles the IS/LM curve, to examine the significance of the credit channel, particularly through bank lending, during economic shocks.
The study analyzed two sub-samples, from 1974:1 to 1979:3 and from 1979:4 to 1985:4, revealing that the variance of money-demand shocks was significantly smaller than that of credit-demand shocks in the first sub-period However, during the 1980s, the relative importance of money-demand shocks increased.
The role of the credit channel in monetary transmission was examined by Ramey (1993) in response to Ben Bernanke's earlier work Utilizing a monthly sample of American data from 1954:1 to 1991:12, Ramey aimed to determine the relative importance of money and credit channels within the monetary transmission mechanism To conduct a detailed analysis, he employed a dynamic stochastic general equilibrium model, incorporating eight variables: industrial production, M1, M2, bank loans, the Federal rate, the 6-month commercial rate, the 3-month Treasury rate, and the inflation rate The findings indicated that the credit channel played a lesser role, with the money channel being significantly more influential in the direct transmission of policy shocks during that period.
Bemarke and Gertler (1995) proposed that the credit channel is a crucial component of the "black box" model, highlighting two key linkages: bank lending and the balance sheet channel Subsequent studies have adopted this framework as a primary reference for examining the role of credit To analyze responses to policy shocks, researchers effectively utilized the vector autoregression method They found that the credit channel could reveal significant costs associated with the capital effects of the pure neoclassical type.
In his 1999 investigation of Korea's financial crisis, Kim examined the significance of the credit channel in the transmission of monetary policy Utilizing monthly data from January 1993 to May 1998, he integrated three methodologies, including a narrative approach and disaggregated bank analysis.
Bernanke and Blinder described the monetary transmission mechanism as a "black box" in their journal, focusing on the bank lending channel using a disequilibrium model They employed standard vector autoregression for econometric specification to assess the significance of loan supply The results offered compelling evidence of the crucial role of the credit channel following the financial crisis.
Following years, many researchers, did the study nearly the same that topic However, many countries which had various characteristics, so those results also were diverse
Warner and Georges (2001) introduced a novel test of the credit view of monetary transmission by analyzing stock market returns, specifically estimating the abnormal returns of U.S manufacturing firms Their findings revealed no consistent relationship between abnormal stock returns and credit constraints during both recessionary (1990-1991) and expansionary (1993-1994) periods Similarly, Suzuki (2004) examined the lending view in Australia from 1985:Q1 to 2000:Q2, concluding that the lending channel was less dominant due to specific characteristics of Australian banks Additionally, Lown and Morgan (2002) and Disyatat and Vongsinsirikul (2003) explored credit effects in the U.S and Thailand, respectively Lown and Morgan utilized bank commercial credit standards as a proxy for credit availability, employing an extended vector autoregression (VAR) model to analyze the data.
This study classifies the loan market into two forms: classical and augmented Through market discrimination, the author identifies the significant role of credit standards in the U.S economy The empirical findings indicate that the dynamics of commercial credit standards significantly impact both loans and economic output Utilizing a typical econometric methodology, the VAR model, Disyatat and Vongsinsirikul present their results.
3 The economists who supported the view: bank loans play important role in monetary policy transmission mechanism
Lown and Morgan (2002) explored the enigmatic nature of credit effects by analyzing three key variables in the Thai economy—real output, the Consumer Price Index (CPI), and the 14-day repurchase rate—over the period from 1993-Q1 to 2001-Q4 Their findings highlighted the significant impact of monetary shocks on investment, emphasizing the crucial role of banks as facilitators in the effective implementation of monetary policy.
Charoenseang and Manakit (2006) found that in Thailand, following the implementation of inflation targeting, the transmission of monetary policy was primarily influenced by the credit channel rather than the interest rate channel during June.
From 2000 to July 2006, the Thai financial market heavily relied on bank lending as a primary source of capital for economic activities The authors reaffirmed the significant role that commercial bank lending plays in the Thai economy.
In the same year, Podpiera (2007) had employed commercial banks data to study the impact of monetary policy shocks on loan market in Czech case; meanwhile Kubo.A
In 2007, research focused on the credit channel as a key aspect of the monetary transmission mechanism in Thailand, emphasizing its significant role Empirical studies, including Podpiera's application of the Kashyap and Stein model using balance sheet data from Czech banks (1996:Q1 to 2001:Q4), demonstrated that monetary policy changes influenced loan growth rates, particularly during the period from 1999 to 2001 Additionally, Kubo employed a structural vector autoregression (SVAR) approach to analyze the effects of exogenous monetary policy shocks on prices and domestic macroeconomic variables, utilizing monthly data from May 2000 to December 2006 across five key indicators: consumer price index, industrial production, producer price index, inter-bank overnight lending rate, and private credit aggregates The findings indicated that the Bank of Thailand's success was significantly supported by the credit channel during that period Furthermore, the research revealed negative impacts on import demand when assessing the effects of monetary policy shocks on international variables within the SVAR framework.
Balazs Egert (2009) investigated the research achievements related to the monetary transmission mechanism in Central and Eastern Europe, revealing that a reduction in the inflation rate significantly influences the degree of exchange rate transmission over time The study identified the credit channel as a crucial element in monetary policy transmission, while the asset price channel lacked effectiveness in the context of stagnant stock and bond markets Similarly, Fiorentini and Tamborini (2001) highlighted the critical role of credit supply in Italy's monetary policy, emphasizing its importance based on research from the past decade.
Once again, with objective to examine the monetary policy transmission for India case
Abdul (2009) utilized a VAR model alongside macroeconomic variables such as bank rate, repo rate, and reserve repo rate, highlighting the significance of the bank lending channel in the transmission of monetary policy to India's economic activities The study also suggested the inclusion of the Fed's rate in analyses of monetary shocks due to its substantial impact on emerging economies like India In a subsequent study, Catao and Pagan (2010) applied an expectation-augmented SVAR model to investigate monetary transmission in Brazil and Chile, using data from the IMF's International Financial Statistics and the Brazilian Planning Ministry Research Institute They emphasized the critical role of the bank-credit channel by incorporating key structural features of emerging market economies, demonstrating that typical credit shocks have robust effects on output and inflation, particularly in Chile, where the banking system's penetration is higher.
Research on the role of credit in monetary policy transmission in Vietnam is limited In 2008, Hung and Pfau analyzed Vietnam's monetary transmission mechanism, although they did not directly address credit's role They utilized a vector autoregression (VAR) approach to examine the relationships among money supply, real output, price levels, real interest rates, real exchange rates, and credit Their findings highlighted a weak connection between monetary policy and its channels in Vietnam, emphasizing that the credit and exchange rate channels are more significant than the interest rate channel.
In short, this chapter has toughed core of thesis through credit channel presentation
Credit theory is explained by external finance premium Monetary policy shock can influence loan market through bank lending channel and balance-sheet channel
ANALYTICAL FRAMEWORK
Vietnam's government influences the economy by adjusting the money supply through four key channels: the interest rate channel, exchange rate channel, asset rate channel, and credit channel Each of these channels impacts macroeconomic variables, including output and inflation, in distinct ways as outlined in economic theory.
The asset channel in Vietnam's stock market is not analyzed in this study due to its inexperience, and the country's capital mobility has been strictly controlled in the past Capital inflows and outflows are primarily influenced by interest rates, indicating that Vietnam's capital mobility is imperfect, which excludes the exchange rate channel from this paper This thesis focuses on the interest rate and credit channels, emphasizing the significance of the credit channel in the transmission of monetary policy in Vietnam Two markets are examined: a classical market without credit and an augmented market with credit, to investigate the role of credit A VAR model will be utilized for both markets through three tests: Granger causality, impulse response, and variance decomposition, revealing the differences between the two markets Ultimately, the study aims to identify the role of the credit channel in the monetary policy transmission mechanism.
MODEL SPECIFICATION
To achieve the thesis objective, a Vector Autoregression (VAR) model will be developed to investigate the significance of the credit channel in the transmission of monetary policy in Vietnam.
According to Stock and Watson (2001), Vector Autoregressions (VARs) are categorized into three types: reduced form, recursive, and structural This thesis employs the VAR approach, specifically focusing on the reduced form as an effective method to achieve its objectives.
A reduced form describes each variable as linear function of its own past value and the past value of all other variables A reduced form ofVAR model can be derived as:
Yt is an m-dimensional vector of endogenous variables
(L) denotes vector polynomial of lag operator with optimal lag order;
Et is assumed to be vector white noise residual
The error term (Et) in regression represents the unpredicted fluctuations in variables after considering their past values Each equation is estimated independently using ordinary least squares, and the optimal number of lagged values is determined through various methods.
This thesis utilizes quarterly data from 1996:Q1 to 2010:Q3, focusing on key macroeconomic variables such as M2, customer price index, domestic credit, real industrial output, refinancing rate, and lending rate Due to specific characteristics of Vietnam, accessing data over a longer period is challenging Table 3.1 provides detailed definitions and sources for these variables, which collectively offer a comprehensive view of Vietnam's macroeconomy The selection of these variables is motivated by findings from Romer and Romer (1990), which indicate that a decrease in reserves leads to reduced loan availability, often resulting from contractionary monetary policy M2 is particularly significant as it serves as a primary measure of money and policy shocks in the Vietnamese context.
• another tool of State Bank of Vietnam to tighten monetary policy (Hung and Pfau,
The customer price index is crucial for assessing inflation, which serves as a significant predictor of economic output To accurately measure domestic loan supply, it is essential to incorporate domestic credit variables into the model Additionally, the lending rate plays a vital role in the policy transmission mechanism While GDP is commonly used to gauge a country's economic growth, Vietnam's GDP data is only available from 2000; therefore, real industrial output will be utilized as a proxy This approach was also adopted in the VAR model by Hung and Pfau (2008) to analyze monetary transmission in Vietnam It is important to control for spurious regression among all variables, as Asteriou and Hall (2007) noted that most macroeconomic time series exhibit trends, indicating they are non-stationary.
Based on the empirical study by Lown and Morgan (2002), which examined the role of the credit channel in the U.S., the loan market was classified into two scenarios: a classical market characterized by quantity and price, and an augmented market that includes credit This framework will be applied to the Vietnamese context, distinguishing between a classical market that encompasses the customer price index, money-quasi, industrial output, refinancing rate, and lending rate, and an augmented market that incorporates credit as a proxy for loan supply or domestic credit to the economy.
DATA SOURCES
M2denoted broad of money stock and are defined by formula:
M2= Money + Quasi-money tot nghiep down load thyj uyi pl aluan van full moi nhat z z vbhtj mk gmail.com Luan van retey thac si cdeg jg hg
In 2009, IFS defined M2 as encompassing money (Ml), savings, time deposits in national currency, and demand deposits in foreign currency, excluding those of the central government, held with other depository corporations.
The Consumer Price Index (CPI) is calculated based on data from the 37 largest provinces across eight economic regions in Vietnam, with weights derived from the 2004 Vietnam Household Living Standard Survey, as noted by the IMF in 2009.
CREDIT denoted domestic credit It is the sum of credit to the nonfinancial public sector, credit to private sector and other account
OUTPUT denoted real industrial output As already represented, Vietnam's industrial output is used as proxy for GDP, due to data limited
M2 Broad money stock IFS-IMF
CPI Customer price index IFS-IMF
CREDIT Domestic credit to economy IFS-IMF
OUTPUT Real industrial output Vietnam GSO
REF IN Refinancing rate IFS-IMF
LR Lending Rate IFS-IMF
REFIN symbolized refinancing rate That is the rate charged by the State Bank of Vietnam on its lending to facilities to all credit institution (IMF world and country noted, 2009)
The lending rate (LR) is determined by averaging the rates at the end of a period for short-term working capital loans from four major state-owned commercial banks, as noted by the IMF in 2009.
Excepting for output that is extracted from Vietnam General Statistic Office, these variables are taken from the International Monetary Fund's (IMF) International Financial Statistic (IFS).
STEPS OF ESTIMATION
Stock and Watson (200 1) stated that due to the complicated dynamics in the V AR, below statistics are more informative than estimated V AR regression coefficients or R 2 statistics
Stationary time series are crucial for accurate analysis, as non-stationary series can lead to misleading results, often referred to as "spurious" correlations Therefore, it is essential to conduct stationarity tests on all variables prior to applying the VAR model, as emphasized by Gujarati (2003).
Several formal statistical tests address the unit-root problem, with the Augmented Dickey-Fuller (ADF) and Phillips-Perron (PP) tests being the most favored These tests incorporate additional lagged terms of the dependent variable to effectively eliminate autocorrelation.
The Granger causality test is a crucial step in the regression analysis of VAR models and is widely used in economic policy analysis This test serves as an effective tool for assessing the significance of coefficients, allowing for accurate predictions of variable X1 based on its past values.
Yt variable rather than not using such past value, or causality represents the ability of one variable to predict another variable
Impulse responses illustrate how current and future values of each variable react to a one-unit increase in the current value of one of the VAR errors, while keeping other errors constant This analysis includes the plotting of ±1 standard error bands, providing an approximate 66 percent confidence interval for each impulse response.
Using the forecast error decomposition econometric tool, we can analyze the percentage of variance in forecasting errors attributed to specific shocks over a defined horizon (Stock and Watson, 2001).
FINDING AND DISCUSSION
DESCRIPTIVE STATISTIC
This part reports the descriptive statistic of all variables of original data, also changed
It summarizes the mean, median, max, min, standard deviation and count of each variable
Table 4.1: Description statistic ofvariables Variables Mean Median Maximum Minimum Std Dev Obs
Source: Calculated from IMF-IFS and GSO data
The high standard deviation of CPI, CREDIT, M2, and OUTPUT, along with the significant spread between their maximum and minimum values, indicates considerable volatility during this period (see Table 4.1) Consequently, estimation results based on their original values may be unreliable However, by transforming these variables into logarithmic form and multiplying by 100, or by estimating them in percentage changes, the standard deviation significantly decreases.
Figure 1 a&b in the appendix provides an overview of the original data presented in this thesis Both domestic credit supply and quasi-money exhibit a similar upward trend, particularly accelerating after 2007, while incremental output shows minimal variation As discussed in Chapter 2, the significant increase in credit can be attributed to substantial capital inflows and real estate price bubbles.
UNIT ROOT TESTS
Asteriou and Hall (2007) assert that macroeconomic variables typically exhibit trends The Augmented Dickey-Fuller (ADF) and Phillips-Perron (PP) tests confirm that all examined variables are non-stationary, as indicated in Tables 4.2 and 4.3.
Table 4.2: Augment Dickey-Fuller test
M2 CPI CREDIT OUTPUT REF IN
Source: Calculated from IMF-IFS and GSO data
Meanwhile changed data are stationary; excluding CL _ CPI variable has not satisfied criteria to conclude stationary at ADF test However, it is satisfied at PP test case
Therefore, those data can be employed to find the keys answer of thesis
Variables Exogenous t-statistic p-value Data in Level
Source: Calculated from IMF-JFS and GSO data
Concern to the optimal lag problem for V AR model, different criteria are used to determine
Table 4.4: Optimal lap-Classical market
Lag Logl LR FPE AIC sc HQ
The article discusses the use of Eviews for self-calculation, emphasizing the importance of downloading the latest version for optimal performance It highlights the significance of accurate data analysis in academic research, particularly for master's theses The content also mentions the necessity of using reliable sources and tools to enhance the quality of research outputs.
Table 4.5: Optimal lap-Augmented market
Lag Logl LR FPE AIC
* indicates lag order selected by the criterion LR: sequential modified LR test statistic (each test at 5% level) FPE: Final prediction error
AIC: Akaike information criterion SC: Schwarz information criterion HQ: Hannan-Quinn information criterion sc
As shown at table 4.4&4.5, various statistical methods can be used to choose the optimal lag length for our model But AIC and SCare known two most important ones
To minimize the information criteria, the optimal number of lags is determined to be five, based on the minimum Akaike Information Criterion (AIC) for both markets Therefore, I have chosen five lags for both cases when applying the VAR model.
VARREGRESSION STATISTICS FOR CLASSICAL AND AUGMENTED
Regression statistics for VAR with a classical market are presented at table 4.6 The numbers in this table are p-values when run V AR Granger Causality test include 5 lags
The null hypothesis states that independent variable does not cause dependent variable
Lagged values of most variables significantly predict output at the 5 percent level, with the exception of the lending rate, which is significant at the 10 percent level While the lending rate does not predict money-quasi, it is useful for forecasting the consumer price index, output, and refinancing rate at the 10 percent level Additionally, the refinancing rate shows limited predictive power.
The analysis indicates that macroeconomic variables can be predicted at a 10 percent significance level, with the exception of output While money supply does not Granger cause lending rates, it is effective in predicting output, price levels, and refinancing rates at a 10 percent significance level From the late 1980s to 2000, Vietnam's interest rate mechanism aimed to maintain positive real interest rates as a strategy for controlling inflation (Dung, 2010) This goal was achieved, although there were instances when deposit rates exceeded lending rates, such as in March 1989 when the spread between industry loan rates and three-month household deposits was -1.5 percent (IBP USA, 2005) In August 2000, the State Bank of Vietnam transitioned from a ceiling mechanism to a base interest rate mechanism, allowing for more flexibility in setting lending rates (IBP USA, 2005).
In Vietnam, the lending rate has not been liberalized until recently, which has hindered its ability to reflect the true demand and supply in the money market (Hung and Pfau, 2008) In a market lacking credit, no independent variable in the classical market serves as a Granger cause for money supply The weak correlation between lending rates and money supply indicates that classical market theories may overlook critical factors influencing monetary dynamics.
Table 4.6: VAR Regression Statistic- Classical market
Classical credit V AR Granger- CausalityTest Market
DeQendent Variable IndeQendent vars CL CPI CL LR CL M2 CL OUTPUT CL REFIN
The data has been sourced from the International Monetary Fund (IMF) and the General Statistics Office (GSO), providing insights into economic trends and statistics For the latest updates and comprehensive analysis, please refer to the full report available for download.
Table 4.7: VAR Regression Statistic- Augmented market Augmented V AR Granger- CausalityTest
CL_CPI CL_CREDIT CL_LR CL_M2 CL_OUTPUT
CL_LR CL_M2 CL_OUTPUT
Source: Calculated from IMF-IFS and GSO data
Note: The reported are p-value
The augmented credit market reveals that lagged values of credit significantly forecast money supply, with a p-value of zero, indicating the State Bank of Vietnam primarily uses credit to inject liquidity into the money market However, credit does not Granger cause output or price level, with p-values of 0.67 and 0.19, respectively Price level is a useful predictor of money supply at a 5 percent significance level Although the lending rate does not predict output, it shows a weaker Granger causation for money policy shocks or credit at a 10 percent significance level This improvement highlights the crucial role of credit in the market Additionally, price level and refinancing rate together Granger cause output, while output and lending rate can predict credit at a 10 percent significance level, whereas M2 fails to forecast either credit or output.
Regression statistics reveal several key insights Firstly, the VAR results with classical market analysis may inadequately explain monetary transmission and the lending channel, while an augmented model that includes credit proves highly significant in forecasting money supply Secondly, the lending rate's influence appears diminished in models without credit, but its importance is enhanced in models that incorporate credit Lastly, the price level and lending rate emerge as the second and third most useful variables for predicting money supply beyond the credit factor.
IMPULSE RES PONES AND VARIANCE DECOMPOSITIONS
In Vietnam, we analyze the shifts in monetary policy by examining the impacts of shocks to the money supply, specifically M2.
Figure 4.1: The impulse response functions for classical market
Response ofCL_CPito CL_LR Response ofCL_CPI to CL_M2 R pon ofCL_CPI to CL_OUTPUT Response ofCL_CPI to CL_REFIN
R.eponae ofCL_LRto CL_CPI Reapon.eofCL_LR to CL_LR Response of CL_LR to CL_M2 Response ofCL_LR to CL_OUTPUT Respon ofCL_LR to Ct_REFIN
Response of CL_M2to CL_LR Respon.e ot Cl_MZ to CL_M2 Response of CL_M2 to CL_OUTPUT
Response ofCL_OUTPUT toCL_lR Response ofCL_OUTPUT ằ CL_OUTPUT ã~ I
R"ponu ofCL_REFINto Cl_CPI Response of CL_REFIN to CL_LR Response of CL_REFIN to CL_OUT PUT R••ponse of CL_REFIN to CL_REFIN
Source: Calculated from IMF-IFS and GSO data
The monetary policy shock indicates a significant decline, dropping from 4.46 in the first quarter to 0.006 in the third quarter, reflecting a substantial tightening Output adjusts with a lag of one quarter, showing greater fluctuations compared to M2 The findings suggest that output is quite sensitive to monetary shocks, though not in a one-to-one manner, with responses lasting for two quarters before recovering growth in the fourth quarter The lowest output level is 1.32 percent below the pre-shock level Additionally, the lending rate positively responds to the monetary shock after one quarter, peaking at 2.2 percent in the sixth quarter, but subsequently declines over the next three quarters while M2 continues to reflect a tight policy.
Price level also reacts slowly when M2 shocks happening, after fifth quarter Response of refinancing rate to money shock also occurs one quarter and attains 3 8 percent at peak
The money supply positively reacts to a decrease in lending rates after one quarter, although this effect is short-lived According to economic theory, a contractionary monetary policy leads to higher lending rates, which in turn restrains investment, ultimately decreasing aggregate demand and output However, this expected response does not always occur consistently.
Historically, the relationship between two variables has shown anomalies, particularly when M2 consistently increases while lending rates do not align with expectations Notably, in 1998, lending rates were constrained at 14.4 percent despite ongoing M2 growth This phenomenon reoccurred from Q3 2002 to Q3 2008, attributed to poor credit conditions in real estate and financial investments (Dung, 2010) Additionally, the output's response to lending rate shocks occurs in the second quarter but only persists for one quarter.
For output shocks, money supply reacts strongly after one quarter only (third row, fourth column)
These reactions are consistent with the regression statistic; output is highly sensitive to monetary shock; the impact of lending rate shock on money supply is somewhat weak
The response of all variables indicates the cumulative percentage change following the shock.
Figure 4.2: The impulse response functions for augmented market
R11pon11 oiCL_REFW b CL_CPI
Rnpon11 ofCL_LR bCL_CREDIT
Rnpon oiCI._RB=N lo CL_CREDIT
Response to Choles!