The effects of the united states’ unconventional monetary policy on financial market and real economy: evidence in vietnamThe effects of the united states’ unconventional monetary policy on financial market and real economy: evidence in vietnamThe effects of the united states’ unconventional monetary policy on financial market and real economy: evidence in vietnamThe effects of the united states’ unconventional monetary policy on financial market and real economy: evidence in vietnamThe effects of the united states’ unconventional monetary policy on financial market and real economy: evidence in vietnamThe effects of the united states’ unconventional monetary policy on financial market and real economy: evidence in vietnamThe effects of the united states’ unconventional monetary policy on financial market and real economy: evidence in vietnamThe effects of the united states’ unconventional monetary policy on financial market and real economy: evidence in vietnamThe effects of the united states’ unconventional monetary policy on financial market and real economy: evidence in vietnamThe effects of the united states’ unconventional monetary policy on financial market and real economy: evidence in vietnamThe effects of the united states’ unconventional monetary policy on financial market and real economy: evidence in vietnamThe effects of the united states’ unconventional monetary policy on financial market and real economy: evidence in vietnamThe effects of the united states’ unconventional monetary policy on financial market and real economy: evidence in vietnamThe effects of the united states’ unconventional monetary policy on financial market and real economy: evidence in vietnamThe effects of the united states’ unconventional monetary policy on financial market and real economy: evidence in vietnamThe effects of the united states’ unconventional monetary policy on financial market and real economy: evidence in vietnamThe effects of the united states’ unconventional monetary policy on financial market and real economy: evidence in vietnamThe effects of the united states’ unconventional monetary policy on financial market and real economy: evidence in vietnamThe effects of the united states’ unconventional monetary policy on financial market and real economy: evidence in vietnamThe effects of the united states’ unconventional monetary policy on financial market and real economy: evidence in vietnamThe effects of the united states’ unconventional monetary policy on financial market and real economy: evidence in vietnamThe effects of the united states’ unconventional monetary policy on financial market and real economy: evidence in vietnamThe effects of the united states’ unconventional monetary policy on financial market and real economy: evidence in vietnamThe effects of the united states’ unconventional monetary policy on financial market and real economy: evidence in vietnamThe effects of the united states’ unconventional monetary policy on financial market and real economy: evidence in vietnam
MOTIVATIONOFRESEARCH
Mishkin (2022) stated that central banks worldwide predominantly employ a very short-terminterestrateastheirprimarypolicytool.IntheUnitedStates,theFederalReserve (Fed) conducts monetary policy by adjusting the Federal funds rate According to Federal Reserve
(2021), Fed implements monetary policy by employing a number of measures to control financial circumstances that promote progress toward its dual mission goals 1 Monetary policy has a direct impact on short-term interest rates, which in turn affects other financial conditions such as stock prices, the dollar's exchange value, and asset prices Through these channels, monetary policy affects the actions of people and companies, impacting total spending, investment, production, employment, and inflation in the United States Under normal economic circumstances, monetary policy changes short-term interest rates and various actions that central banks take to influence the economy and financial markets.However,theeffectivenessofconventionalmonetarypolicy(CMP)instrumentshas not yielded the desired outcomes about financial stability, deficit reduction, and debt reduction, particularly considering recent financial and debt crises and the more recent pandemic and its devastating effects on the globaleconomy.
In2008,duringtheglobalfinancialcrisis(GFC),andagainin2020,theFederalfunds rate reached zero due to economic collapse caused by epidemics, requiring additional stimulus measures How can the Fed and other central banks support the economy when short-term interest rates still are near zero?Toaddress the limitations imposed by the zero lower bound on short-term interest rates, the United States (US) and other advanced economies (AEs) have also introduced new measures known as non-standard monetary policyorunconventionalmonetarypolicy(UMP).AccordingtoBernanke(2022),thecentral bank lowered its short-term interest rate target to zero and committed to keeping it at that level for as long as necessary. When short-term interest rates approach the zero-bound (as shown inFigure 1.1), economists refer to this as the "zero lower bound," signifying thatthe central bank's CMP tool has reached its limit and cannot be further employed to provide stimulus Consequently, not only is it difficult for central banks to reduce interest rates further,butitalsobecomeschallengingtoachievetheirinflationgoals.Thisglobalcrisishas
1 Federal Reserve’s actions, as a central bank, to achieve the “dual mandate” goals specified by Congress: maximum employment and stable prices in the United States
-4.00 led to significant disruptions in the financial markets and a severe economic downturn in advanced economies and other countries worldwide.
In response to this situation, UMP appeared and played a pivotal role in managing central banks' monetary policies, particularly during prolonged economic crises UMPseeks to impact macroeconomic variables by adjusting medium and long-term interest rates by altering the central bank's balance sheet, providing forward guidance, and implementing negative interest rates One of the most significant tools within UMP is Quantitative Easing (QE) In 2008, the Fed introduced a new tool: Large-Scale Purchases of longer-term securities, specifically government-guaranteed mortgage-backed securities (MBS) In various forms, this tool would play a central role in the monetary strategies of many central banks in the subsequent years (Bernanke, 2022).
Implementing Large-Scale Asset Purchase
(LSAP)operationshassignificantlyexpandedtheFed'sbalancesheetandaffectedlong-term bond yields. During the 2007–2009 financial crisis and the recent pandemic, Fed and numerous other central banks relied extensively on these tools (Bernanke, 2022) Another essential tool is forward guidance, designed to influence financial conditions by shaping market expectations of future monetarypolicy.
Source: IFS – IMF data and Wu and Xia (2016) shadowrate
The widespread adoption of numerous UMPs during the GFC brought about significant transformations in both financial markets and the real economy, affecting both advancede c o n o m i e s a n d t h e r e s t o f t h e w o r l d , p a r t i c u l a r l y e m e r g i n g e c o n o m y m a r k e t s
(EMEs)anddevelopingcountries.ThedeploymentofUMPtoolsinAEsreducedbondyields and increased real GDP, stock prices, and the Consumer Price Index (CPI) Additionally, it spurred portfolio flows into other countries, resulting in heightened real output growth and positive responses from the financialmarkets.
The instability in global finance has persisted since the GFC The outbreak of the COVID-19 pandemic in late 2019 delivered a severe shock to economies worldwide Most nations resorted to lockdowns and isolation measures to have the pandemic's spread, resulting in economic stagnation Consequently, global GDP experienced a significant decline in 2019, approximately 3%, and is expected to continue falling sharply in the subsequentyears.Incontrast,duringthe2009financialcrisis,theglobalGDPlosswasonly 0.1% (Gopinath, 2020) Economies faced a pronounced and enduring increase in unemployment and public debt, and many businesses closed or went bankrupt To mitigate the adverse economic impacts of COVID-19, central banks swiftly implemented a range of robust policies These measures included interest rate cuts, liquidity support for commercial banks, and various forms of support for private sectors In this context, UMP once again played a pivotal role in the policy management of central banks when the pandemic hurt stock markets by reducing stock returns, and CMP did not reverse the adverse impact of the pandemic (Iyke & Maheepala,2022).
In the United States, as a response to the COVID-19 pandemic, Fed took measuresto support the economy in the face of new challenges In March 2020, there were two special sessions of the Federal Open Market Committee (FOMC) intending to bolster economic activity On March 3, 2020, Fed lowered the Federal funds rate, initially from a range of 1.5%to1.75%toarangeof1%to1.25%.Later,onMarch16,therangewasfurtherreduced to 0%-0.25% (Tepper & Adams, 2024) In August 2020, the Fed announced significant changes to its monetary policy-making framework process initiated before the pandemic These changes were designed to enhance the potency of monetary policy in an environment whereinterestrateswerealreadylow.Insubsequentmonths,theFedprovidedfurtherclarity by explicitly stating its commitment to keeping interest rates low for as long as necessary Concurrently, concerns about the virus triggered the worst week in US financial markets sincethe2007– 2009financialcrisis,servingasawarningsignalfortheeconomy(Bernanke, 2022) This is only the second time this interest rate has reached the zero lower bound In thisc o n t e x t , i t i s e s s e n t i a l t o e x a m i n e h o w t h i s U M P a f f e c t s b o t h t h e r e a l e c o n o m y a n d financialmarketsinAEsandothercountries.Thisanalysiscanprovidevaluableinsightsand implications for dealing with similar situations in the future This analysis is crucial considering the global health crisis caused by COVID-19, which has posed unprecedented challenges to economiesworldwide.
The United States' new monetary policy operations always serve as necessarysignals for central banks in developing countries to adjust their economic policy implementations Gai and Tong (2022) examine the international impact of the information on US’smonetary policy When Fed tightens monetary policy, it reveals a tightened monetary stance and optimism about the economy, raising global output and asset prices Monetary announcements from the US can signal optimism or pessimism, with far-reaching consequences for global economic activity Therefore, the various approaches to this policy have raised significant concerns about their potential international spillover effects on developing countries' real economies and financial markets Identifying which countries are most affected by these US policy decisions is particularlyinteresting.
The United States, one of the countries heavily affected by the pandemic crisis in
2019, has aggressively implemented fiscal and monetary policies to address the epidemic and boost its economy These measures include providing social security support packages, engaging in large-scale government asset purchases, conducting widespread overnight and termrepotransactions,andreducingdiscountlendinginterestrates.Thecapitalinflowsfrom implementing UMP tools in advanced economies can exert pressure on various aspects, including real output, asset prices, foreign exchange rates, and overall financial conditions These inflows also contribute to increased volatility in financial markets and real economic activities The effects of AEs' UMP measures can be transmitted through various channels, suchastheportfoliorebalancingchannel,theinterestratechannel,theexchangeratechannel, the asset price channel, and the credit channel Developing countries are particularly vulnerabletoeconomicuncertainty,especiallyinthefaceofunexpectedchangesinmonetary policy inAEs.
AsignificantnumberofempiricalstudieshaveanalyzedthedomesticimpactofUMP in advanced economies and its international spillover effects on the rest of the world Many of these studies have primarily focused on examining the response of financial markets within AEs such as (Breedon et al., 2012; Eksi & Tas, 2017; Guerello, 2018; Haitsma et al.,2016;Putniņš,2022;Rahman&Serletis,2023;Saiki&Frost,2014;Weale&Wielad ek,
2022),interestrate(Bauer&Neely,2014;Baumeister&Benati,2010;Breedonetal.,2012; Jọger & Grigoriadis, 2017)… Another focus on the impact of UMP on the macro economy andeconomicactivityinAEs(Fratzscheretal.,2016;Gambacortaetal.,2014;Jawadietal., 2017; Meinusch & Tillmann, 2016) These findings make valuable contributions to the empiricalevidence.However,theyhaveyettoaddressthisissueinthecontextofapandemic crisis, nor have they compared the differences between implementing UMP tools to manage a GFC crisis versus a pandemic crisis in various advanced economies, particularly those nationswithsignificantinfluenceonthedevelopmentofothereconomies,suchastheUnited States.
Moreover, another strand of research concerns the international impact of this policy on EMEs and developing countries, but in limited quantities These studies pay more attention to the financial market in emerging economies, such as interest rates, asset prices, andexchangerates….(Anayaetal.,2017;Apostolou&Beirne,2019;Bowmanetal.,2015; Chen et al., 2014; Chen et al., 2016; Eser & Schwaab, 2016; Gupta & Marfatia, 2018; Tillmann, 2016; Uz Akdogan, 2023; Yilmazkuday, 2022), they also concentrate on the real economy as well (Chen et al., 2017; Fic, 2013; Punzi & Chantapacdepong, 2019) or capital flow (Alper et al., 2020; Chen et al., 2014; Kiendrebeogo, 2016; Le et al.,2022).
While these studies have consistently yielded results such as increased portfolio inflows, heightened output growth, asset price surges, and exchange rate appreciation, their focus has been mainly on EMEs when examining the international spillover effects of advanced economies’ UMP However, it is essential to recognize that, beyond EMEs, other regions warrant investigation as well Some studies on related topics have underscored the critical role played by EMEs and frontier markets, particularly in the context of portfolio flows and the stock market Moreover, the dynamics of international monetary policy spillovers are intricately linked with portfolio rebalancing, asset price channels, and various other channels within the monetary transmission mechanism.
Asian economies are also affected by the GFC and the UMP of advancedeconomies, especially the United States, in different ways (Punzi & Chantapacdepong, 2019) Some studies find that UMP in AEs has positive spillover effects on Asian and Pacific countries, suchascapitalinflows,stockmarketgrowth,currencyappreciation,andproductionincrease such as(Tran & Pham, 2020) Other studies find that these effects are minor or negligible,andthattherearedifferencesamongAsianandPacificcountries(Rafiq,2015).According to Outlook Frontier Markets (2021), in 2020, the return on equity of frontier markets is a 67% premium to developed markets Frontier markets, offering high returns and low correlationswithothermarkets,areappealingtoinvestorsdespitetheirhigherrisksandlower liquidity They have grown rapidly, becoming a popular investment class with lower debt and higher foreign-exchange reserves relative to their GDP With optimistic anticipation, manybelievethesemarkets,giventheirgrowthrates,willbecomeeconomicsuccessstories Research shows that investment efficiency in frontier markets surpasses some developing markets. Sukumaran, Gupta, and Jithendranathan (2015) highlight substantial benefits for Australian investors diversifying into these markets, with US investors reaping even greater rewards. Furthermore, market shocks from developed countries impact frontier markets, particularly during crises (Samarakoon, 2011) Given these considerations, frontier markets present a compelling option for international investors, complementing investments in emergingmarketeconomies.Theimportanceoffrontiermarketsisunderscored,particularly considering monetary policy adjustments during the COVID-19 pandemic, which may necessitate a reevaluation of investment strategies This could involve a potential pivot towards investments in safe-haven assets and economies, or a focus on regions that yield higherreturns.
ThisstudywillrevisitthespillovereffectsofUMP,focusingontheUnitedStatesand frontier market economies in Asia, particularly Vietnam As per the KOF Globalization Index, Vietnam is recognized as a country with substantial trade and financial integration The study’s focus is on the Asian region due to its vibrant economic growth and its statusas asignificanteconomiccenter.Theseeconomiesaresimilarintheirsusceptibilitytomonetary policy uncertainties in advanced economies, a result of historical regional financial crises andtheirongoingtransitiontowardsfinancialliberalizationandeconomicglobalization.The study excludes developed Asian countries like Japan and newly industrialized countrieslike Taiwan, Korea, andSingapore The remaining Asian countries share similar levels of development and characteristics such as geography, economy,anddemographics.
Figure 1.2: Vietnam KOF Globalization Index
RESEARCHOBJECTIVES
The main objective of this study is to analyze the international spillover effects of the unconventionalmonetarypolicyoftheUnitedStatesontheVietnamesefinancialmarketand the real economy Regarding the financial market in Vietnam, the primary representative is thestockmarket.Therealeconomydealswithproducing,purchasing,andcirculatinggoods and services within aneconomy.
First,this study examines how the Vietnamese financial market reacts to theUS’sUMP announcements during the GFC and the COVID-19 pandemic UMPs are alternative measurestostimulatetheeconomywhenconventionaltoolsareineffective.TheUS’sUMP affects not only its own economy and financial market, which are the largest in the world, but also many other countries through spillover effects This research explores how these effects influence the Vietnamese financialmarket.
Second,thisresearchscrutinizestheresponseofVietnam’srealeconomytotheshocks oftheUS’sUMPduringtheglobalfinancialcrisisandtheCOVID-19pandemic.WhileUMP announcementsfromtheUScaninstantaneouslyaffectthefinancialmarket,macroeconomic variables, particularly GDP growth and inflation, exhibit delayed responses Analogous to the financial market’s reaction, the implementation of UMP to bolster the US economy during crises generates spillover effects on other global economies, including Vietnam, via multiple transmissionchannels.
Third, this research delves into the exploration of potential disparities in the international spillover effects of the US’s UMP on Vietnam’s financial market and real economy during two distinct periods of crisis: the global financial crisis and the COVID-19 pandemic.
The US resorted to the use of UMP as a response mechanism during both crises. However, the contexts of the GFC and the COVID-19 pandemic differed significantly The GFC was primarily a financial crisis, triggered by the subprime mortgage crisis in the US, whichledtoaglobalbankingcrisis.Ontheotherhand,theCOVID-19pandemicwasahealth crisis that resulted in an unprecedented global economic shutdown These differences in the nature of the crises led to variations in the timing, scale, and specific measures of UMP implementation by the Federal Reserve.These variations could result in distinct impacts of theUS’sUMPo n Vietnam’sfinancial market and realeconomy.The study aims to analyze these impacts in detail, considering factors such as changes in asset prices, exchange rates,andcapitalflows,andchangesinGDPgrowthandinflationintherealeconomy.Thefindings of this research could provide valuable insights for policymakers, investors, and researchers interested in the international spillover effects ofUMP.
RESEARCHQUESTIONS
To achieve the research objectives above, this study goes to answer three questions corresponding to the specific objectives as follows:
Question1:DoestheVietnamesefinancialmarketreacttotheUS’sUMPannouncementsin the global financial crisis and the COVID-19 pandemicperiod?
Question 2:Does the real economy of Vietnam respond to the US’s UMP shocks in the global financial crisis and the COVID-19 pandemic period?
Question3:DodifferencesexistintheeffectsoftheUS’sUMPontheVietnamesefinancial market and real economy between the global financial crisis and the pandemiccrisis?
The study's scope is essential since it might affect the reliability of the study Hence, the next part discusses it.
THE SCOPE OFTHISSTUDY
This study will investigate how theUS’sUMP affects the Vietnamese stock market’s immediate reaction to official UMP announcements and the real economy ofVietnamfrom 2007to2022.Emphasiswillbeplacedontwosignificantperiods:theGFCandtheCOVID-
First,thepurposeofthisstudyistoinvestigatethespillovereffectsofUMPonVietnam, a country that has the characteristics of a frontier financial market and an open, smalleconomy.These features make Vietnam a suitable case for analyzing how UMP actions in a major economy can influence the economic and financial conditions in a smaller and less developed economy This study concentrates on the UMP tools that the United States has employed since the GFC The study does not include the UMP tools of other advanced economies, such as the Euro area, Japan, and the United Kingdom, in theanalysis.
Second,thechoiceofthestudyperiodisessentialtoensurethevalidityandreliabilityof thestatisticalmodel.ThisresearchwillexaminethespillovereffectsoftheUS’sUMPon
Vietnam’seconomy from 2007 to 2022 This period covers the whole span of the US implementationUMP,which started in response to the GFC and the COVID-19 pandemic crisis.ThisperiodalsoallowsforacomprehensiveanalysisofhowtheUS’sUMPeffectsthe economic and financial conditions in Vietnam, as well as the role of major events, such as the GFC and the COVID-19 pandemic crisis, in the international transmission of the U.S.UMP.
Third, this study will examine the immediate response of the Vietnamese stock market to the announcement of the US's UMP implementation, which serves as a proxy for all markets and different sectors 5 , following the announcement of the US’s UMP implementation The analysis will specifically focus on listed stocks on the HOSE, rather than encompassing the entirety of Vietnam's financial markets This emphasis is driven by several considerations:
(i) For the Vietnamese stock market, companies can be listed and if they meet the requirements according to the regulations The stocks of these companies can be listed on twoexchanges,HOSEorHNX.Duetoitsformationanddevelopmentprocess,aswellasits scale, HOSE primarily lists large enterprises from various fields The market capitalization of HOSE as of April 2022 is 13.12 times higher than HNX 6 , so the Vnindex (indicator of HOSE) can be represented the Vietnamese stock market, all companies listed on HOSE can also represent the listed companies on the Vietnamese stock market In addition, with the eventstudymethod,whendeterminingabnormalreturns(AR)basedonthemarketandrisk- adjusted model or the market-adjusted model, if combining all stocks in both stock exchanges,itwillnotbeappropriatewhencalculatingARbecausethefluctuationmarginon these two stock exchanges is different Specifically, the fluctuation margin of HOSE is +/- 7% while the fluctuation margin of HNX is +/-10%.
(ii) the study employs an event study method and relies on daily data Unfortunately, daily trading data is limited in the Vietnamese bondmarket.
5 The study will analyze the stock price reactions of all industries listed on HOSE, classified according to theGICSindustryclassificationstandard.ThedetailedindustryclassificationispresentedinAppendix 1 6 According to data published by the State Securities Commission ofVietnam
(iii) in the case of the foreign exchange market, the exchange rate is managed by the centralbank,makingitchallengingtoobserveimmediatefluctuationsinresponsetotheUS’sUMPevents.
Finally, this study will examine the response of Vietnam's real economy, a proxy for price index and output, to theUS’sUMP shocks The real economy is concerned with creating, purchasing, and moving commodities and services within aneconomy.It contrasts with the financial economy, which focuses only on exchanging money and other financial assets that reflect ownership of or claims to ownership of goods and services from the realeconomy.Sincetheterm"realeconomy"appliestoallrealornon-financialcomponents,real variables can be used to model the realeconomy.
Appropriate methodologies, which will be explained in the following section, must discover the correct answers to the research questions.
RESEARCH METHODOLOGIESANDDATA
Researchmethodology
Theeventstudymethod(ESM)isastatisticalandeconometrictechniquethatanalyzes the effects of specific events or shocks on financial markets or economic variables Widely used in finance, economics, and related disciplines, this method assesses how particular events impact asset prices, stock returns, and other key financial indicators According to
Neely(2015),onemustexamineassetpricechangesasannouncementsorothernewschange market expectations to evaluate the effects of theUMP.As a result, the technique may be applied to examine occurrences instantly ESM is current in addition to having quick access toawealthofdatasinceassetvalues,includingstockprices,areprospective.Forthatreason, thisresearchemploystheESMtoanalyzetheeffectsoftheUS’sUMPannouncementonthe Vietnam stock market based on the approach of (Galloppo & Paimanova, 2017; Kolari & Pynnonen, 2011;Lubys & Panda, 2021; MacKinlay, 1997; Pacicco et al., 2018, 2021) Results from ESM will answer the first research question In addition, by comparing the research results in two periods, it will also answer part of the third research question, the difference in the effect of theUS’sUMP on the Vietnamese financial market in two crisis periods.
The structural vector autoregression(SVAR)model to study the effects of theUS’sUMP shocks on Vietnam's real economy based on the methodology of (Carrera & Ramírez- Rondán, 2020; Cushman & Zha, 1997; Li et al., 2010; Yildirim & Ivrendi, 2021). The monthly dataset spanning 16 years, from 2007 to 2022, will encompass various implementationsoftheUS’sUMPsincetheGFCandtheonsetofthepandemiccrisis.SVARhaslongbeen regardedasacornerstoneinempiricalmacroeconomics,enablingthestudyof expected responses of model variables to one-time structural shocks, such as policy actions orunexpectedeconomicchanges(Kilian,2013).TheessenceofSVARistoobtainstructural parameters and shocks based on observing the reduced formVARdeveloped by (Sims, 1980).SVARallows for as many types of shocks as time series variables in the set by assumingthatobservablevariablesareendogenous.Incontrast,shocksaretheimpulsesthat move thesystem.
Consequently, theSVARmodel will be used in this research to investigate the international spillover effects of theUS’sUMP on the Vietnamese economy from 2007 to
2022 Then, this study will use another variable representing theUS’sUMP to replace the previousonetocheckitsrobustness.Theseresultswillanswerthesecondresearchquestion.
Bycomparingtheresearchresultsintwoperiods,thestudywillanswertheremainingofthe third research question, the differences in the effects of theUS’sUMP on the real economy ofVietnamin two crisisperiods.
Researchdata
This study has three groups of data:
First, the daily stock index and stock prices in Vietnam from 2007 to 2022 are collected, focusing on defining the event window, event date, and estimation window This data has been sourced from the Ho Chi Minh City Stock Exchange (HOSE).
Second, the announcement days of the US’s UMP announcements in the GFC period based on the research of the Fed and (Bowman et al., 2015), the event days in the COVID-
19 pandemic period based on the Fed and (Clarida et al., 2021).
Vietnamese macroeconomic data spanning the period from 2007 to 2022 The monthlydata on the total assets of the Federal Reserve's balance sheets and the VIX index were sourced from the Federal Reserve Bank and the Chicago Board Options Exchange (CBOE), respectively Additionally, data on foreign portfolio investment flows toVietnamwere obtainedfromtheIMF.ForVietnam'smonthlymacroeconomicindicators,includingmarket interestrates,thenominalexchangerateofUSD/VND,Vietnam'soutput,andinflation,data from 2007 to 2022 were collected from theIMF.
Finally, in the section assessing the over view of the Vietnamese financial market in theperiodfrom2000to2022,inadditiontothedailystockindexdataintroducedabove,the study also uses data on the number of listed companies, market capitalization value, and trading volume from HOSE to analyze the overview of the Vietnamese financial market which represented by the stockmarket.
RESEARCHCONTRIBUTIONS
The main contribution of a study that examines the effects of the US’s UMP on the Vietnamese financial market and the real economy In detail, there are four contributions of this thesis:
First, this research stands as one of the limited scholarly works that delve into the exploration of the influence exerted by the UMP of the United States on a frontier market, specifically Vietnam Frontier markets, such as Vietnam, are less mature than emerging marketsandoftenshowrapideconomicgrowth,makingthemaninterestingareaofstudyin the context of international monetary policy spillover effects This research aims to fill this gap by providing an in-depth analysis of theUMP’simpact onVietnam’sfinancial market andrealeconomy.Furthermore,thefindingsofthisstudycouldhavesignificantimplications for the development of effective monetary policies and investment strategies in frontier markets Therefore, this research not only contributes to academic knowledge but also has practical relevance for economic policy and investmentdecision-making.
Second, this research employs a multifaceted approach to examine the effects of the
US’s UMP by utilizing a range of proxies These proxies include UMP announcements,which provide insights into the policy intentions of the Fed, the total assets of the Fed’s balance sheet, which reflect the scale of the UMP; and the shadow short rate, which is a measure that captures the stance of monetary policy when nominal interest rates are at the zero lower bound In addition to these proxies, the study also conducts robustness tests on the results Robustness tests are crucial in empirical research as they check the reliability of the results under different assumptions or methodologies By conducting these tests, the study ensures the validity and reliability of its findings.
Through this comprehensive and rigorous approach, the study provides an in-depth understanding of the impact of the US’s UMP on Vietnam It sheds light on how changes in UMP in the world’s largest economy can have spillover effects on a frontier market like Vietnam This contributes to the broader understanding of international monetary policy transmission and can inform policy decisions in both developed and frontier markets.
Third,this research makes a significant contribution to the existing bodyofliteraturebyprovidingacomparativeanalysisofthepotentialdifferencesinthe effectsoftheUS’sUMPduringtwodistinctperiodsofeconomiccrisis:theGFCandtheCOVID-
19pandemic.TheUMP,which was employed by the Fed during both crises as ar e s p o n s e mechanism However,thenatureofthesecriseswasfundamentallydifferent- theGFCwasprimarilyafinancialcrisis,whiletheCOVID- 19pandemicwasahealthcrisisthatledtoaneconomicdownturn These differences in the nature and context of the crises could potentiallyl e a d tovariationsi n t h e e f f e c t s o f t h e UMP.B y a n a l y z i n g t h e s e v a r i a t i o n s , t h i s s t u d y p r o v i d e s empiricalevidenceonhowtheimpactsofUMPcandifferacr ossdifferentcrisiscontexts.Furthermore, the findings of this research could have implications forotherc o u n t r i e s , particularlythosewitheconomiesthatareintricatelylinkedtotheU Seconomy.Thus,thisresearchhasbothacademicandpracticalrelevance,contributingtoth eliteratureoninternationalmonetarypolicytransmissionandinformingpolicydecisionsintherealwo rld.Lastly, the research reveals that both the financial market and the reale c o n o m y i n Vietnamexhibited a positive response to the shocks induced by theUS’sUMP,particularlyduring the GFC and COVID-19 pandemic Furthermore, the study identifiest h e risk-takingand portfolio rebalancing channels as critical conduits for the transmission ofUMP’s spillover effects.
THE STRUCTURE OFTHESTUDY
The study is structured into five chapters as follows:
This chapter provides an overview of the research background and motivation, research objectives and questions, research scope, and the structure of the study.
This chapter presents an overview of the theoretical framework of unconventionalmonetary policy, including its instruments and international transmission channels It also reviews relevant literature on thetopic.
In this chapter, the study introduces the research methods used to investigate the impact of the US’s UMP on the Vietnamese financial market and the real economy The research data and data sources are also presented in this chapter.
Thischapterpresentstheresultsobtainedfromthe eventstudymethod(ESM)andstructural vector autoregression (SVAR) It analyzes the research findings to elucidate the impact of the US’s UMP on the Vietnamese financial market and the realeconomy.
Chapter 5: Conclusions and policy implications
Thelastchapteroffersconclusions,researchcontributions,andpolicyimplicationsbasedon theresearchfindings.Italsooutlinesthestudy'slimitationsandsuggestsdirectionsforfuture research.
This chapter introduces the research topic, which examines the impact of the US’sUMP on the Vietnamese financial market and the real economy The chapter begins by providing an overview of how central banks use short-term interest rates as their primary policy tool and how conventional monetary policy (CMP) instruments have limitations in stimulating the economy during crises The chapter emphasizes the importance of understanding the spillover effects of UMP on developing and frontier markets, such asVietnam.TheresearchobjectivesaretoanalyzetheeffectoftheUS’sUMPonVietnamand to identify potential differences in response during the global financial crisis (GFC) and the COVID-19 pandemic The scope of the study is outlined, focusing on the period from 2007 to 2022, which covers the US implementation UMP during the GFC and the COVID-19 pandemic The chapter concludes by describing the structure of the entire thesis, which includestheoreticalframeworks,literaturereview,researchresults,andpolicyimplications.
CONCEPTUALFRAMEWORK
Conventionalmonetarypolicy
Monetary policy is a fundamental tool utilized by governments and central banks to manage the flow of money within an economy This policy framework encompasses the actions and decisions designed to regulate the overall money supply, its accessibility, and prevailing interest rates The Cambridge Dictionary accurately defines monetary policy as
"monetary actions taken by a government to control the amount of money in an economy and its availability, for example, by changing the interest rate.”
Meanwhile, Federal Reserve (2021) defines monetary policy refers to the actions of central banks to achieve macroeconomic policy objectives such as price stability, full employment, and stable economic growth Its main policy tools are the target for thefederal funds rate (the rate that banks charge each other for short-term loans), a key short-term interest rate Bank of England (2020) provides another definition, that monetary policy isan actionthatacountry’scentralbankorgovernmentcantaketoinfluencehowmuchmoneyis intheeconomyandhowmuchitcoststoborrow.EuropeanCentralBank(2021)alsodefines
‘monetarypolicy’asthedecisionstakenbycentralbankstoinfluencethecostandavailability of money in aneconomy.
From the above concepts, we can understand that conventional monetary policy is a macroeconomic management policy in which the central bank uses tools that affect operational objectives, modifying the money supply and interest rates influencing monetary policy's ultimate purpose: price stability, economic growth, and employment The monetary policy objective is to deliver price stability and consequently support the macroeconomic objectives, including growth and employment (Mishkin, 2022).
Mishkin(2022)indicatedthat(i)openmarketoperations,(ii)discountlending,and(iii) reserve requirements are the three monetary policy instruments used by the FederalReserve to control the money supply and interest rates.Together,these three instruments - open market operations, discount lending, and reserve requirements - form the backbone of what is commonly referred to as classic or conventional monetary policy tools They arethe primary means by which the Federal Reserve manages the money supply and interest rates, thereby influencing economic activity. a Open marketoperations
An open market operation is a monetary policy instrument that central banks use to manage and control the amount of money in circulation This is achieved through the purchase or sale of government securities, such as treasury bonds.
When the central bank buys these securities in what is known as a buying operation, it effectively injects money into the economy This is because the money used to purchase the securities goes into the banking system, thereby increasing the number of reserves and base money available As a result, the overall money supply in the economy increases. Furthermore, this increase in the money supply tends to lower short-term interest rates, making borrowing cheaper and encouraging spending and investment.
Conversely, when the central bank sells these securities in a selling operation, it essentially takes money out of the economy The money received from the sale of the securities is removed from the banking system, leading to a decrease in reserves and base money This reduction in the money supply has the effect of increasing short-term interest rates, making borrowing more expensive and discouraging excessive spending and investment.
According to Mishkin (2022), open market operations, the principal drivers of the primary causes of fluctuations in the money supply, are fluctuations in interest rates and the monetary base, which were the most significant conventional monetary policy tools before the global financial crisis There are two types of open market operations: defensive open market operations and dynamic open market operations Defensive open market operations seektooffsetchangesinothervariablesthataffectreservesandthe monetarybase.Thegoal of dynamic, open market operations is to change the number of reserves and the monetary base.
Insummary,openmarketoperationsareacrucialtoolforcentralbankstoregulatethe money supply and control interest rates, thereby maintaining economic stability and promoting sustainable economicgrowth. b Discountlending
The discount window is the location where the central banks can provide reserves to banks—examining how the discount window functions can help you better grasp how the central bank influences the amounts of borrowed reserves The term “discount window” refers to the mechanism through which central banks can supply reserves to commercial banks Understanding how the discount window operates can provide valuable insights into the ways in which a central bank can influence the volume of borrowed reserves within the banking system.
Primary credit is the most significant form of discount lending in the context of monetarypolicy.Itisastandinglendingfacilitythatallowsfinanciallystablebankstoborrow from the centralbank’sprimary credit facility These loans are typically of extremely short duration,oftenjustovernight.Thisfacilityisdesignedtoprovidebankswithareliablesource ofliquidity,enablingthemtomeettheirshort-termfundingneedsandmaintaintheirday-to- day operations (Mishkin,2022).
Secondary credit is given to banks in financial trouble with major liquidityproblems. Seasonalcreditisofferedtomeettheneedsofseverallocalbanksinvacationandagricultural areaswithseasonaldeposits.Theseasonalcreditinterestrateisdeterminedbyaveragingthe federal funds rate and certificate of deposit rates (Mishkin,2022). c Reserverequirements
Banks maintain accounts at the central bank, where they hold their deposits These deposits,alsoknownasreserves,playacrucialroleinthebankingsystemandaresubjectto regulations set by the centralbank.
The total reserves held by a bank are divided into two distinct categories The first category is the required reserves, which are the minimum number of reserves that a bank is mandated to hold by the Federal Reserve, the central bank of the United States This requirement is intended to ensure that banks have enough liquidity to meet their short-term obligationsandtoprovideabufferagainstpotentialfinancialshocks.Thesecondcategoryis excess reserves, which are reserves that banks choose to hold over and above the required minimum. Banks may choose to hold excess reserves for a variety of reasons, such as to provide additional liquidity, to earn interest, or to meet unexpected cash outflows (Mishkin, 2022).
According to Mishkin (2022), changes in the reserve requirement ratios affect the moneysupplybychangingthemultiplierofthemoneysupply.Ariseinreserverequirements restricts the number of deposits held by a given monetary base level, leading the money supply to contract.Increases in reserve requirements boost reserve demand and raiset h e federal funds rate On the other hand, a reduction in reserve requirements causes the money supply to expand and the federal funds rate to fall Changes in reserve requirements are currentlyveryseldomutilizedasamonetarypolicyinstrumentsinceitisexpensiveforbanks to alter their reserve holdings when reserve requirementschange.
2.1.1.3 Transmission mechanism of conventional monetarypolicy
Mishkin (2022) proposed four main transmission channels through which monetary policy affects the economy: the interest rate channel, the currency channel (or exchangerate channel), the asset price channel, and the credit channel The details of the transmission mechanism of CMP are presented inFigure
Figure 2.1: Monetary policy transmission mechanism
Modifying monetary policy leads to a change in the real interest rate, resulting in a shift in investment spending, thereby causing output The classic interpretation of the monetary transmission mechanism is shown by the following diagram, which depicts the effect of monetary policy easing achieved by reducing the rate of real interest: r↑⇒I↓⇒Y ad ↓
Tightening monetary policy increases short-term nominal interest rates As a result, long-term real interest rates will also rise A rise in real interest rates leads to declining investment spending (I), finally reducing total output (Y ad ). r↓⇒I↑⇒Y ad ↑
Unconventionalmonetary policy
In normal times, CMP dominates as an effective tool in implementing the central bank's monetary policy They are implemented via short-term interest rates or adjusting aggregate money by operations on the open market However, they have had demerits in recentyearsandceasedtobeeffective,especiallywhentheglobaleconomysufferedseveral crisesthatstronglyinfluencednationalgrowthandsocialissues.Mishkin(2022)showedtwo reasons for central banks to use UMP.Firstly, a negative economic shock can result in an effective-lower- bound dilemma in which the central bank cannot significantly lower its policy rate (the Federal funds rate) below zero.Secondly, the central bank's capacity to stimulateeconomicgrowthislimitedbecauseofthedisruptionoffinancialmarkets,resulting in the inability to move cash to people and businesses with viable investment prospects, reducing economic activity. Another reason is in a “new normal,” in which inflation that is toolowcanbeasconcerningasinflationthatistoohigh,andinwhichalow,neutralinterest rate,bylimitingthespaceforshort-termratecuts,severelyreducesthepotencyoftraditional monetary policies (Bernanke, 2022) For both reasons, central banks require non-interest- rate measures, often known as non-standard monetary policy or unconventional monetary policy instruments, to stimulate the economy after the GFC and the COVID-19pandemic.
Reserve Bank of Australia (n.d) provides the following definition of UnconventionalMonetary Policy that it is a collection of actions implemented by a central bank to meet extraordinary economic conditions when typical monetary policy instrumentsa r e insufficient These unconventional measures are used when traditional tools, such as policy interestrates,minimumreserves,andopenmarketoperations,donothavethedesiredimpact According to Smaghi
(2009), UMP is defined as policies that directly target the cost and availability of external finance for banks, households, and non-financial companies These financial sources include central bank liquidity, loans, fixed- income securities, orequity.
In summary, UMP can be understood as a set of measures taken by central banks to address abnormal economic conditions CBs only resort to these measures if conventional monetary policy tools, such as short-term interest rates, reserve requirements, and open market operations, fail to achieve the desired outcomes (Ngô & Nguyễn, 2020) According to Bhattarai and Neely (2022), many central banks, most notably the Federal Reserve (Fed), the Bank of England (BOE), the European Central bank (ECB), the Bank of Japan (BOJ), the Swiss National Bank (SNB), the Swedish Central bank (Riksbank), and the Danish National Bank (DNB) have employed UMP.
There are four main unconventional monetary policy tools that central banks use to stimulate the economy after crises in which traditional monetary tools cannot work: (i) liquidityprovision,(ii)assetpurchases,(iii)forwardguidance,and(iv)negativeinterestrates
(Mishkin,2022).A c c o r d i n g toBhattaraiandNeely(2022),themostimportantofthesehave been broad asset purchases, i.e., QE, and communication with the public, i.e., forward guidance (FG), to reduce medium- and long-term interest rates.Table2.1shows the UMP tool used by major central banks worldwide in recentdecades.
Table 2.1: Unconventional monetary policy tools used by major central banks
Tools BoE BoJ ECB Fed
Expansion of lender of last resort facilities
Source: Fiebiger and Lavoie (2021) a Expansion of lender of last resort facilities or liquidityprovision
In response to the GFC, many central banks have made significant changes to their current market operations to deal with financial market turmoil that has become less liquid (i.e.,assetscannotbeeasilyconvertedintocash).Changesintheoperationsofcentralbanks include:
- TheDiscountWindowExpansion:thediscountwindowisafacilitythatFedusestohelp commercialbanksenhancetheirshort-termliquiditybyallowingthemtoborrowdirectly from the Fed, then they will pay Fed discount rate The expansion of the discount windowappearedduringtheGFCperiod;Fedcutthediscountratebymanybasispoints (25-50 basis points) from August 2007 to March 2008 (Mishkin,2022).
- TermAuctionFacility(TAF)isaprogramsetbyFedtohelpincreasetheliquidityofthe US credit market These loans are usually less than one month TAF allows depository institutionstoauctionamountsofcollateral-backedshort-termloans.UsingTAFismore optimalthandiscountwindowsasitwillenablefinancialinstitutionstoborrowatalower ratethanthediscountrate.Thatrateisdecidedmorecompetitivelythanthecentralbank's penalty interest rate (Mishkin,2022).
- New Lending Programs: This program promoted liquidity in the financial system by broadening lending objects, such as investment banks, instead of traditional depository institutions.NewlendingprogramsledtotheexpansionoftheFed’sbalancesheetsince the beginning of2008. b Forwardguidance
According to Bernanke (2022), in addition to QE, in recent years, Fed and almost all other major central banks have relied heavily on forward guidance or communication by policymakers about how they expect the economy and policy to evolve This is one of the central bank's tools to convey messages to the public about its future monetary policy, and on that basis, to influence the financial decisions of households, firms, and investors It includes providing information regarding future policy implementation to influence policy expectations and announcing the willingness of central banks to pursue non-standard monetary policy in the long run The main driver of forward guidance is reinforcing the central bank's commitment to low-interest rates, which may help push down long-term interestrates.Overall,forwardguidancehelpsreduceuncertaintyoveracountry'seconomic and financial prospects For instance, Fed has committed to keeping the Fed funds rate at zero for an extended period With such a commitment, short-term interest rate forecasts in the market in the future are lowered, resulting in the decline of the long-term interest rate.
The fundamental insight motivating forward guidance is that financial conditions dependonthecurrentshort-termpolicyrateandmarketexpectationsoffuturerates.Ifmarket participants believe the funds rate will increase, they will also bid up long rates, tightening financial conditions For the same reason, if they come to expect a lower funds rate in the future, they will bid down longer-term rates To the extent that forward guidance influences expectations, it can become an additional policy lever Although most forward guidance is aimed at financial markets, in principle, central bank pronouncements could also affect broader publicexpectations. c Asset purchases or quantitativeeasing
Purchasing assets of central banks is usually conducted on the open market, with assets only consisting of short-term government securities But all has changed since the GFC; central banks began performing a range of LSAP, also called QE According to Bernanke (2022), QE as large-scale purchases by the central bank of longer-term securities, aimed at reducing longer-term interest rates, easing financial conditions, and, ultimately, achieving macroeconomic objectives such as full employment and price stability Central banksusethisprogramwithlong-termprivatesectorassetstodirectlyaffectassetprices.QE is characterized as a strategy that increases the central bank's balance sheet to raise the amountofmoneyavailablefromtheinstitution(inparticular,bankreserves)intheeconomy The goal was to expand the amount of money in the economy by purchasing financialassets from the private sector This would lead to an increase in nominal spending and ensure that inflation was on pace to reach the CPI inflation target over the medium run QE appears to work in practice, affecting financial markets—and, through them, the economy—via two broad channels: the portfolio-balance channel and the signaling channel (Bernanke,2022).
AccordingtoGagnonetal.(2018)and(Bernanke,2022),theprimarychannelthrough whichLSAPs appear to work is by affecting the risk premium on the asset being purchased By purchasing a particular asset, a central bank reduces the amount of the security that the private sector holds, displacing some investors and reducing the holdings of others while simultaneously increasing the amount of short- term, risk-free bank reserves held by the private sector For investors to be willing to make those adjustments, the expected returnon the purchased security must fall Put differently, the purchases bid up the asset's price and lower its yield This pattern was described by (Tobin, 1958, 1969) and is commonly known as the “portfolio balance” effect According to Bernanke (2022), besides its effects on the relativesupplyofsecuritiesinprivatehands,QEalsoworksthroughwhathasbecomeknown as the signalingchannel.
According to M A Joyce et al (2011), QE is sometimes contrasted with a strategy known as credit easing, which changes the asset allocation on the central bank's balance sheet, for example, by alternating between government bonds with short and longmaturities or by investing in risky private assets like corporate bonds or stocks Both are parts of the central bank's policy, although balance sheet expansion was givenpriority. d Negative interestrates
Negative interest rate policy occurs when the nominal interest rate falls below 0% for a specific economic sector (International Monetary Fund, 2020) After the GFC, central banks of AEs, such as the ECB and BOJ, set up a negative interest rate on their deposits It means banks had to pay interest to their central banks instead of receiving it Central banks wouldalsoinstitutenegativedepositratestoencouragebankstoshifttowardhigher-yielding assets and narrow asset purchases to improve functioning in specific markets (Bhattarai &Neely,2022) This leads to an essential purpose in encouraging lending bank deposits to households and firms, stimulating investment, and raising output.
2.1.2.3 Transmission mechanism of unconventional monetarypolicy
AccordingtoM.A.Joyceetal.(2011),centralbankcanboosttheliquidityofbalance sheets in the private sector by injecting cash into the economy in exchange for other assets. Thisincreasedliquiditymayaffecttheeconomyinnumerousways.QEisthemostessential tool of UMP The effects of QE on the real economy were argued to operate through traditionalneoclassicalchannelsmainly:usercostofcapitalorTobin’sq,wealtheffects,and theexchangerate(Bernanke,2010;Yellen,2011).Thedetailsofthetransmissionmechanism of QE are presented inFigure 2.2 Additionally, there are several channels that UMP transmits to the economy These transmission channels are quietly various but popular in theoreticalliterature. a The signalingchannel
Financial market andrealeconomy
Financial markets are where people buy or sell a variety of financial assets, including stocks,bonds,currencies,andderivatives.Financialmarketshelptheeconomybyallocating resources,producing liquidity, and determining the values of various financial assets.AccordingtoMadura(2021),afinancialmarketisaplacewherefinancialassets(securities) like stocks and bonds may be bought and sold In financial markets, funds are transferred when one party purchases financial assets that were previously owned by another party. Financialmarketspromotetheflowofcapital,enablingfinancingandinvestmentbypeople, businesses, and government organizations Financial markets come in a variety of forms, including stock, bond, foreign exchange, and derivatives markets Every market has unique features, purposes, andplayers.
Mishkin (2022) stated that the basic function of financial markets is to channel funds fromsaverswhohaveanexcessoffundstospenderswhohaveashortageoffunds.Financial markets can do this either through direct finance, in which borrowers borrow funds directly from lenders by selling them securities, or through indirect finance, which involves a financial intermediary that stands between the lender-savers and the borrower-spenders and helps transfer funds from one to the other. According to Madura (2021), financial markets' primary purpose is to transfer money from savers with excess funds to spenders with insufficient finances Financial markets can accomplish this through two different methods: indirect finance, which involves a financial middleman acting as a bridge between lender- savers and borrower-spenders to facilitate the transfer of funds between them, and direct finance, in which borrowers obtain funds directly from lenders by selling themsecurities. The efficiency of our economy, the conduct of firms, and the wealth of individuals are all directly impacted by financial markets Particular attention should be paid to three financial markets: the bond market, which sets interest rates; the stock market, which influences people's wealth and businesses' investment decisions; and the foreign exchange market, which affects the U.S economy significantly due to fluctuations in the foreign exchangerate.Theglobalizationoffinancialmarketshasacceleratedatarapidpaceinrecent years Financial markets have become increasingly integrated throughout the world (Mishkin, 2022).
There are different ways to classify financial markets, depending on the criteria used. The most common classification criteria are claim on the issuer, other criteria can be mentioned:asmaturityofclaim,natureofclaim,organizationalstructure,etc.Thesecriteria are academic in classification of financial markets However, with other levels of developmentofthefinancialmarketintheworld,financialinstitutionsofferamorepractical classification method According to MSCI (2023), by grouping markets according to commoncharacteristics,wearehelpinginvestorsbetterunderstandandcomparediffe rent markets MSCI communicates the list and analysis of equity markets under each category (Developed, Emerging, Frontier 7 and Standalone markets) Financial institutions such as FTSE, MSCI, S&P and Russell also divide the financial markets of countries around the world according to the 4 groups above.
According Chen et al (2022), a frontier market is a country that is more established thantheleastdevelopedcountriesbutstilllessestablishedthantheemergingmarketsbecause it is too small, carries too much inherent risk, or is too illiquid to be considered an emerging market A frontier market is a market that has smaller market capitalization and liquidity, and they tend to have a lower correlation with price movements in other emerging and developed markets Since they are growing at an even quicker pace, this youngergeneration is destined to become tomorrow’s more mature emerging markets Frontier markets are geographically and economically diverse and are found all over the world – in Africa, Asia, LatinAmerica,andcentralandeasternEurope.ThecountriesincludeNigeria,Kenya,Egypt,
SaudiArabia,Bangladesh,Vietnam,Kazakhstan,Romania,Argentinaandmanymore–over 40 in total (Serkin, 2015) These countries have been under-researched or ignored as they were too small and perceived as being too risky or difficult to enter because of foreign exchange restrictions and other investorbarriers.
7 In this section, the study only focusing on the frontier market to clarify the purpose of researching.
Figure 2.4: Some frontier markets in the world
Frontier markets are attractive to investors who seek high returns and low correlations with other markets, but they also entail higher risks and lower liquidity than emerging or developedmarkets.Accordingto(Serkin,2015),overthepast25yearswe’veseenemerging marketsgrowintoamulti-trilliondollarassetclass.Buttoday,wecaninvestinawholenew set of emerging markets: the frontiermarkets.
Frontier markets are not only growing faster – they also have a number of characteristicsthatmakethemsaferthanimagined.Theyhavelowerdebtandhigherforeign- exchangecashpilesinrelationtotheirgrossdomesticproduct.Accordingto(Andrikopoulos et al., 2016), frontier markets have now become a popular investment class among institutional investors internationally, with major financial services providers establishing index-benchmarks for this market- category The anticipation for frontier markets is optimisticuncertainty,andmanypeoplebelievethat,giventheirgrowthrates,thesemarkets will be economic successstories.
Some studies also show that the investment efficiency in this market is better than some developing markets Sukumaran et al (2015) finds that there are significant benefits for the Australian investor from diversifying into frontier markets However, the benefits to the US investor are much higher than that of an Australian investor The results from the holding out period also present significantly higher benefits to the US investor compared to the Australian investor In addition, shocks from developed countries also affect this group of markets, especially in crisis periods rather than normal periods (Samarakoon, 2011).
According to Cambridge Dictionary, the concept of real economy is the part of a country's economy that produces goods and services, rather than the part that consists of financial services such as banks, stock markets, etc The real economy is focused on the activities that allow human beings to directly satisfy their needs and desires, apart from any speculative considerations.
According to Pirounakis (1997), a broad definition of the ‘real’ economy involves the production, transportation, and selling of goods and services — as opposed to the exchange of paper assets, which is the concern of the ‘paper’ economy of the world of finance A narrower definition would focus on material goods only, sectors like industry, commerce, agriculture,shipping,supermarkets,construction.Eitherway,the‘real’economy,directlyor indirectly, is, and always will be, the foundation of theeconomy.
Output is an important indicator to measure the real economy Output is demanded by firms, by households, by the government and by foreigners Since interest rates and bank lending affect the demand for output, the financial sector interacts with the real economy (Begg et al., 2014).Krugman andWells(2018) states that the concept of economic growth as the growing ability of the economy to produce goods and services As wesaw,economic growth is one of the fundamental features of the real economy Therefore, the important indicator to measure GDP is the gross domestic product (GDP) or GDP growth, which reflectstheproductivecapacityandefficiencyofaneconomy,aswellasthelivingstandards ofitspopulation.Inaddition,indicatorssuchas:industrialproductionindex(IPI),consumer price index (or inflation), unemployment rate, balance of payments can also be used to measure the real economy.
