Phân tích phản ứng của các biến số vĩ mô trước cú sốc chính sách tiền tệ thông qua mô hình keynes mới nhằm nâng cao chất lượng dự báo kinh tế vĩ mô của việt nam tt tiếng a

This approach aims to evaluate the response of important macro variables in monetary policy such as output gap, inflation, exchange rate, and policy interest rate before the shocks of th

MINISTRY OF EDUCATION AND TRAINING STATE BANK OF VIET NAM

BANKING UNIVERSITY HO CHI MINH CITY

NGUYEN HOANG CHUNG

ANALYZING THE RESPONSE OF MACRO VARIABLES BEFORE MONETARY POLICY SHOCKS THROUGH A NEW KEYNES MODEL TO IMPROVE THE

QUALITY OF VIET NAM’S MACRO ECONOMIC FORECAST

THESIS SUMMARY Major: Finance - Banking Code: 9 34 02 01

HO CHI MINH CITY - 2019

MINISTRY OF EDUCATION AND TRAINING STATE BANK OF VIET NAM

BANKING UNIVERSITY HO CHI MINH CITY

NGUYEN HOANG CHUNG

ANALYZING THE RESPONSE OF MACRO VARIABLES BEFORE MONETARY POLICY SHOCKS THROUGH A NEW KEYNES MODEL TO IMPROVE THE

QUALITY OF VIET NAM’S MACRO ECONOMIC FORECAST

THESIS SUMMARY Major: Finance - Banking Code: 9 34 02 01

ACADEMIC ADVISOR

2 Ph.D LE DINH HAC

HO CHI MINH CITY - 2019

LIST OF AUTHOR’S PUBLICATION *

number

Publication’s year

Publication’s address

1

Analysis of Monetary Policy shocks in the New

Keynes model for Viet Nam’s Economy:

Rational Expectations Approach

ISSN 1860-949X

2019

Springer EconVN Paper 2019

2

Forecasting model for Vietnam's small and

opened economy Methodology approach:

The impact of monetary policy and macro

prudential policy on financial stability in Viet

Nam – regarding credit growth

Viet Nam’s macroeconomy – Analysis and

forecasting: 2018 – Actively respond to shocks

to maintain macroeconomic stability

ISBN 978-604-971-485-6

2018 Banking University

HCMC Conference

5

Viet Nam’s macroeconomy – Analysis and

forecasting: Viet Nam’s macroeconomy 2019

before the decisive turn

2019 Banking University

HCMC Workshop

6 Determinants of debt to market value ratio: the

case of Viet Nam

The effect of monetary policy and

macroprudential policy to financial stability in

9 A New Keynes model without the LM curve

ISSN

0866 – 7802

2018

Journal of Economics - Technology

Note: The publications (1), (2), (3), (8) relate directly to this thesis

(*) Each study presented includes: cover page, table of contents, articles

TABLE OF CONTENTS

CHAPTER 1: INTRODUTION 1

1.1 The necessity of the study 1

1.2 Setting research issues 1

1.3 Objectives of the study 2

1.3.1 General objectives 2

1.3.2 Detail objectives 2

1.4 The study’s questions 2

1.5 Objectives and scope of the study 2

1.5.1 The study’s objectives 2

1.5.1.1 The factors of monetary policy and macroprudential policy affect credit growth 2

1.5.1.2 Macroeconomic variables of the New Keynes model 3

1.5.2 The scope of this study 3

1.5.2.1 Factors affect credit growth 3

1.5.2.2 Factors affect a small opened economy 3

1.6 Methodology Research 4

1.6.1 The method of estimating variables affects credit growth 4

1.6.2 The method of estimating macro variables of the SVAR new Keynes model 4

1.6.3 The method of estimating macro variables of the DSGE new Keynes model 4

1.7 The scientific and practical significance of the thesis 4

1.8 Research gap 4

1.9 The structure of study 4

1.10 Summary Chapter 1 5

CHAPTER 2: THE THEORY BACKGROUND OF THE NEW KEYNES MODEL 6

2.1 Theoretial framework and literature review 6

2.1.1 The theory of macroprudential policy 6

2.1.1.1 Financial Stability 6

2.1.1.2 Macroprudential policy 6

2.1.2 The theory of monetary policy 6

2.1.2.1 Conceptual framework 6

2.1.2.2 Monetary policy transmission 6

2.1.2.3 The basic principles of monetary policy 6

2.1.2.4 The purpose of the monetary policy 7

2.1.3 The theory of general equilibrium 7

2.1.4 The theory of aggregate supply – aggregate demand 7

2.1.5 The theory of money supply and inflation 7

2.1.6 The framework of the inflation targeting policy 8

2.1.6.1 The conception 8

2.1.6.2 Characteristics and key factors of inflation targeting policy 8

2.1.6.3 The goals of inflation targeting policy 8

2.1.6.4 Conditions for applying inflation targeting policy 8

2.2 Basic theories of the new Keynesian model 8

2.2.1 The overview of the New Keynesian theory 8

2.2.1.1 The New Keynesian model structure with 3 equations 9

2.2.1.2 The New Keynesian model structure with 4 equations 9

2.2.1.3 The model structure applied in Vietnam (developed by IMF) 9

2.2.2 An SVAR new Keynes model 9

2.2.2.1 IS equation 10

2.2.2.2 AS equation 10

2.2.2.3 Uncovered Interest Parity (UIP) 10

2.2.2.4 A forward – looking monetary policy 10

2.2.2.5 Rational expectations econometrics 10

2.2.3 A DSGE new Keynes model 11

2.2.3.1 The theory of DSGE model 11

2.2.3.2 The structure of the DSGE model 12

2.2.3.3 The framework of policy analysis and theory of economic forecasting 12

2.2.3.4 The variety of DSGE model 13

2.2.3.5 Frictions cost of DSGE model 13

2.2.3.6 Advantage and disadvantage of DSGE model 13

2.3 Literature review 14

2.3.1 Studies of monetary and macroprudential policy 14

2.3.1.1 Foreign studies 14

2.3.1.2 Domestic studies 14

2.3.2 Studies of the SVAR new Keynes model 14

2.3.3 Studies of the DSGE new Keynes model 15

2.4 Summary chapter 2 16

CHAPTER 3: METHODOLOGY RESEARCH 17

3.1 For monetary and macroprudential policy 17

3.1.1 Model 17

3.1.2 Data research 17

3.1.3 Methodology research 17

3.1.4 Research procedures 17

3.2 For the SVAR new Keynes model 18

3.2.1 Econometric model 18

3.2.1.1 VAR model 18

3.2.1.2 SVAR model 18

3.2.2 Data research 18

3.2.3 Methodology research 19

3.2.4 Research procedures 19

3.2.4.1 Diagnostics of the reduced form VAR model 19

3.2.4.2 Contemporaneous structural parameter analysis 19

3.2.4.3 Impulse response function (IRF) 19

3.2.4.4 Variance decomposition 19

3.3 For the DSGE new Keynes model 19

3.3.1 Model 19

3.3.1.1 The IS equation 19

3.3.1.2 The New Keynes Phillips curve equation 20

3.3.1.3 Monetary policy equation 20

3.3.1.4 Other equations 20

3.3.2 Data research 20

Source: Summary of the author from many different studies 20

3.3.3 Methodology research 20

3.3.4 Research procedures 21

3.3.4.1 Procedures estimation for BVAR – DSGE model 21

3.3.4.2 Priors for the DSGE model 21

3.5 Summary chapter 3 22

CHAPTER 4: RESEARCH RESULTS AND DISCUSSION 23

4.1 Descriptive statistics 23

4.1.1 Micro variables data 23

4.1.2 Macro variables data 23

4.2 Empirical analysis 25

4.2.1 The first model 25

4.2.1.1 FGLS results and discussions 25

4.2.1.2 Robustness of FGLS model 25

4.2.2 The second model 25

4.2.2.1 Contemporaneous structural parameter estimation 25

4.2.2.2 Impulse response function 26

4.2.2.8 Variance decomposition 28

4.2.3 The third model 30

4.2.3.1 Selection of  and the lag length 30

4.2.3.2 DSGE model 30

4.3 Summary chapter 4 32

CHAPTER 5: CONCLUSIONS, POLICY IMPLICATIONS AND LIMITATIONS 33

5.1 The key results 33

5.1.1 Affirming the role of monetary policy in Vietnam‘s macroeconomy stability 33

5.1.2 Macro variables react dynamically to policy shocks 33

5.1.3 The new Keynesian forecasting model has a meaningful analysis of policy 33

5.2 Policy implications 34

5.2.1 The role of SBV in using monetary policy tools 34

5.2.2 Operating monetary policy 34

5.2.3 A New Keynesian model for macro forecasting 34

5.3 Limitations 34

5.3.1 Data and variables 34

5.3.2 Methodology and Viet Nam economic characteristics 34

5.3.3 Research results 35

5.4 Summary chapter 5 35

CHAPTER 1: INTRODUTION 1.1 The necessity of the study

The scenario of the global financial crisis has changed the perception of Central Banks in the world that the aim of price stability is not enough to ensure financial stability Therefore, central banks need to implement measures and policies aimed at financial stability through monetary and macroprudential policies Accordingly, the evaluation, analysis and forecast of economic development, especially some key macro indicators, play a very important role in planning economic strategies and macroeconomic policies Vietnam's economy is growing rapidly and deeply integrating into the world economy so opportunities and challenges for the process of economic development are increasing, requiring rapid improvement research capacity, macroeconomic forecast in Vietnam

In Vietnam, when macroprudential tools are incomplete, the macroprudential policies have not been able

to fulfill the role of financial stability, so tools’s monetary policy still play an important role in stabilizing and regulating macroeconomy (Nguyen Duc Trung & Nguyen Hoang Chung, 2018) From that role, this study is based

on the new Keynes model for small and opened economies as Vietnam through rational expectations of agents in the economy This approach aims to evaluate the response of important macro variables in monetary policy such

as output gap, inflation, exchange rate, and policy interest rate before the shocks of themselves to identify key variables, thereby contributing to improving efficiency in policy analysis

In recent years, the construction and application of economic models to forecast the economy in Vietnam has improved significantly in recent years and has made an increasingly larger contribution to the policy - making procedures However, there are not many in - depth studies on the development of Dynamic Stochastic General Equilibrium (DSGE) based on the new Keynesian framework in Viet Nam’s macroeconomic forecast Therefore the DSGE model has a stronger theoretical foundation than traditional models For these reasons, the application

of DSGE and SVAR models under the new Keynes framework is becoming more popular at central banks, gradually adding and replacing classical econometric models, especially in central banks which pursued the mechanism of inflation targeting policy

1.2 Setting research issues

The thesis finds evidence that the monetary policy tools have a stronger influence than the macroprudential tools in maintaining financial stability in Vietnam Besides, the study confirms again that Vietnam's economic growth depends heavily on credit growth Therefore the effectiveness of monetary policy is shown through controlling credit growth is still mainly so that it is showing the important role of the State Bank in contributing to macroeconomic stability in Vietnam This is an important point for Keynes's theory (Keynes, 1936) to be applied and developed in this research

First, the SVAR new Keynes model includes the dynamic IS equation based on the marginal utility optimization representation of the subjects in opened and small economies, the aggregate supply equation (AS) or the new Keynes Phillips curve (NKPC) is based on Calvo's (1983) research on a staggered price model, the Uncovered Interest rate Parity (UIP) and a forward-looking monetary policy rule So, the study simulates the reaction of macroeconomic variables including output gap, inflation, exchange rate and a policy interest rate for four structural shocks - aggregate demand shock, aggregate supply shock, exchange rate shock and monetary policy shock

Second, the study of the new Keynes DSGE estimates forecasts for a small and opened economy like Vietnam The model is built and adjusted to be consistent with the forecasting target for macroeconomic variables such as output gap, inflation, policy interest rate, exchange rate fluctuations, and terms of trade

1.3 Objectives of the study

1.4 The study’s questions

First, whether the effectiveness of monetary policy in Vietnam is reflected through controlling credit growth primarily?

Second, why is the new Keynes model suitable for explaining macroeconomic fluctuations in the short term?

Thirdly, how does the shock of macro variables affect these variables through the new Keynes model? Fourth, how is the model predict simulate by the DSGE new Keynes model for macro variables of Vietnam?

1.5 Objectives and scope of the study

1.5.1 The study’s objectives

1.5.1.1 The factors of monetary policy and macroprudential policy affect credit growth

Factors affecting the credit growth of joint-stock commercial banks (JSBs) in Vietnam during the period

macroprudential policy represents the capital adequacy ratio (car), liquidity reserve ratio (liq), the ratio of outstanding loans to deposit ratio (ldr) and control variables to reduce the impact of omitted variables bias and estimation phenomena are unreliable (unstable model, estimated coefficient has no statistical significance, .) economic growth (GDP) and inflation rate ( CPI)

1.5.1.2 Macroeconomic variables of the New Keynes model

1.5.1.2.1 The framework of the SVAR new Keynes model

Macro variables affecting the monetary transmission mechanism in the new Keynesian model of SVAR follow a rational expectation approach

The data series used for this study include the policy interest rate (r): Before 2010, data according to the

IMF - IFS is the interest rate of the State Treasury bill (treasury bill rate); After 2010, this data was IMF - IFS

standardized as policy rate The output gap variable (dy_hp): The output gap is calculated by the log difference between the real output and the HP filter (IMF – IFS) The exchange rate (lne): Exchange rate derived from USD/VND of IMF - IFS; take logarithm nepe (ln) to shrink data, to estimate more accurately Inflation (pi): This

index is represented by the quarterly domestic consumer price index, taking data from IMF - IFS For foreign

variable groups including inflation (cpi_us) and US Federal Fund interest rate (int_us); collect data by IMF -

IFS and the Federal Reserve Board of Governors (FED)

1.5.1.2.2 The framework of the DSGE new Keynes model

Research data include 5 observed variables including: output gap (dy_obs), interest rate (R_obs), inflation (infl_obs), exchange rate fluctuations (de_obs), terms of trade (dq_obs) and take quarterly from quarter I/2000

- quarter IV/2016, based on the sources: IMF - IFS, WB, SBV, GSO The data obtained includes 63 - 65 observed variable groups, all data are averaged for logarithmic deviation from steady state For the purpose of making the forecast for the last 2 quarters and 4 quarters, the study uses 63 and 65 groups of observed variables (sample) to estimate the parameters for the forecasting model, using 2 and 4 retain samples to perform calculations for forecasting

1.5.2 The scope of this study

1.5.2.1 Factors affect credit growth

Source: Data sources are collected from audited financial statements of 21 JSCBs in Vietnam (Vietstock, 2018) In addition, macro variables in Vietnam are collected from reliable websites such as the General Statistics Office (GSO) and the State Bank (SBV), IMF and World Bank (WB)

Time: Research thesis in Vietnam in the period of 2008 - 2017

1.5.2.2 Factors affect a small opened economy

Source: Data source of macro variables in Vietnam and the United States collected from reputable websites such as the General Statistics Office (GSO) and the State Bank (SBV), IMF - IFS and WB under the new Keynes model through SVAR and DSGE methods

Time: Research thesis in Viet Nam in the period of 2000 - 2017

1.6 Methodology Research

1.6.1 The method of estimating variables affects credit growth

Research using table data According to Wooldridge (2002), the study applied the Feasible Generalized Least Squares (FGLS) method to overcome the autocorrelation and heteroskedasticity phenomenon to ensure the estimation are reliable

1.6.2 The method of estimating macro variables of the SVAR new Keynes model

The study uses the SVAR new Keynes model for small and opened economies suitable for Viet Nam economy The structural model consists of a system of equations: (i) An equation of the aggregate demand curve (IS curve) based on the optimization behavior of economic entities; (ii) the aggregate supply equation (AS curve)

or a New Keynesian Phillips curve (NKPC); (iii) an uncovered interest rate parity (UIP) and (iv) a forward - looking interest rate equation

1.6.3 The method of estimating macro variables of the DSGE new Keynes model

Application of model estimation methods in the process of building and developing the DSGE model for small and open economy such as Vietnam

1.7 The scientific and practical significance of the thesis

This study tests and verifies conclusions about the role of monetary policy that ensuring financial stability when the macroprudential policy is still unaccomplished in Vietnam

This research builds a new Keynes model to analyze policies and macroeconomic forecast, identify and measure shocks, serve the planning and administration of the monetary policy of the State Bank in Viet Nam The solutions complete the DSGE new Keynes model and solutions to improve monetary policy in Vietnam

1.8 Research gap

Reaffirming the importance of the new Keynesian model in policy analysis through structural shocks of macro variables There are shreds of evidence that monetary policy instruments have a stronger influence than macroprudential tools in maintaining the financial stability in Vietnam, this is the foundation for using the Keynes model in this thesis About policies research, under the hypothesis of rigid price and wage, the school of new Keynes is more suitable for analyzing monetary policy than other policies (Nguyen Duc Thanh, 2010)

Developing the DSGE new Keynes model to simulate macroeconomic forecasting in Vietnam; recommendations on the use of the SVAR and DSGE new Keynes model in policy communication of the SBV

1.9 The structure of study

Chapter 1: Introduction

Chapter 2: The theory background of the new Keynes model

Chapter 3: Research method

Chapter 4: Research results and discussion

Chapter 5: Conclusions, policy implications and limitations of research

1.10 Summary Chapter 1

The research confirms the important role of monetary policy in controlling macroeconomic stability in Vietnam Then, this study builds a new Keynesian model for a small open economy with an SVAR and DSGE approach This study uses the new Keynesian model with a small sample size of structural parameters (Seonghoon

& Antonio, 2014), assessing the combination of structural shocks and rational expectations The reason for the subjects in the economy is to consider the reaction of the previous macro variables impacted by its own shocks

By the way, the study also assessed the appropriateness of the approach and the compatibility between theory and

practical data to build a meaningful forecasting model for Vietnam

CHAPTER 2: THE THEORY BACKGROUND OF THE NEW KEYNES MODEL

2.1 Theoretial framework and literature review

2.1.1 The theory of macroprudential policy

2.1.1.2 Macroprudential policy

According to Financial Stability Board (FSB), International Bank for Settlement (BIS) and International Monetary Fund (IMF), macroprudential policy uses macroprudential tools to reduce systematic risks and/or financial risk in order to minimize the possibility of a financial system breakdown by preventing financial services which causing serious consequences to the real economy (IMF, 2013a) Finally, besides monetary policy and fiscal policy, the macroprudential policy have supported the State Bank of Viet Nam (SBV) to establish a remarkable trio in macroeconomic acting that has been used effectively in emerging and developing countries (EMEs)

2.1.2 The theory of monetary policy

2.1.2.1 Conceptual framework

Monetary policy is the decision on the monetary level at the national level of the central banks, including the decision to stabilize the value of money expressed by the inflation target, decide to use tools and measures to implement the set objectives (Ly Hoang Anh & Le Thi Man, 2012) Monetary policy is an important part of the macroeconomic policy, including the views, guidelines, and policies to manage and regulate the currency in the economy through the banking system with the main role of the SBV

2.1.2.2 Monetary policy transmission

Bên cạnh việc tóm lược lại các kênh truyền dẫn của CSTT, nghiên cứu tập trung trình bày về kênh kỳ vọng hợp lý, một khái niệm cơ bản của trường phái Cổ điển Mới có khuynh hướng được hấp thu bởi trường phái Keynes mới (Nguyễn Đức Thành, 2010)

2.1.2.3 The basic principles of monetary policy

Basic principles derived from the theory and empirical research of most central banks: (1) Inflation always exists in the economy (Friedman & Meiselman, 1963; Mishkin, 2010a); (2) Stable prices have important benefits; (3) There is no long-term trade-off between inflation and unemployment; (4) The expectation plays an important role in determining inflation and monetary policy transmission mechanism for the macroeconomy; (5) real interest rate increases when inflation increases, i.e., Taylor rule; (6) Monetary policy depends on inconsistent time issues; (7) The independence of central banks helps improve the effectiveness of monetary policy; (8) Commitment with

a firm nominal anchor is the basis for an effective monetary policy; (9) Financial friction plays an important role

in the business cycle

2.1.2.4 The purpose of the monetary policy

The central banks implement monetary policy towards macroeconomic stability, employments, financial stability but price stability is always the most important goal (Cecchetti & Krause 2002; Geraats, 2002 Issing, 2004; Spyromitros & Tuysuz, 2012; Van der Cruijsen & Demertzis, 2007; Jean Louis & Balli, 2013)

Price stability or inflation control policy is a top target and a long-term goal of monetary policy

Table 2.1 Monetary policy targets Tools of the

Policy rate (overnight rate, interbank rate)

Source: Mishkin (2012); Thanh & Hang (2008)

2.1.3 The theory of general equilibrium

The general equilibrium theory is a branch of economics that attempts to explain the behavior of supply, demand, and prices in a whole economy with several or many interacting markets, by seeking to prove that the interaction of demand and supply will result in an overall general equilibrium

2.1.4 The theory of aggregate supply – aggregate demand

Based on the theory of Mishkin (2012) and Nguyen Van Ngoc (2009), the study shows the fluctuation of the economy generally originated from changes in the aggregate supply and demand The exogenous changes in aggregate demand and supply curves are shocks to the economy Shocks break the stability which causing the unbalanced output and employment Therefore, studies of supply and demand shocks to assess macroeconomic policy can minimize the impact of shocks cause to the economy

2.1.5 The theory of money supply and inflation

According to Milton Friedman's theory, the relationship between money supply and inflation is shown by the quantitative equation: M*V = P*Y Therein: M is a volumn of money, V is turned over of money, P is price,

Y is output (real GDP) The quantitative equation can be written as percentages as follows:

% change of M + % change of V = % change of P + % change of Y (i) Or: % change of M = % change of P + % change of Y - % change of V (ii)

In Vietnam, money supply in the economy is mainly through commercial banks' lending channels Thus, equation (ii) shows that real economic growth rate and an inflation rate will determine the rate of credit growth

2.1.6 The framework of the inflation targeting policy

2.1.6.1 The conception

According to Ha Thi Thieu Dao (2012), the inflation targeting mechanism is a policy that the central bank will directly and publicly introduce inflation (framework) as a priority and direct target Inflation is the only indicator that is specified in numbers while other goals such as full employment, or reducing exchange rate fluctuations are also pursued but those are not a priority target In contrast to monetary policy under the inflation targeting mechanism, others indirectly affect inflation through the target of money supply or exchange rate target

2.1.6.2 Characteristics and key factors of inflation targeting policy

The target inflation system has three important characteristics (Lars, 1999): (i) Central Bank clearly

determines the target inflation target; (ii) The country has a clear policy framework for making economic decisions

- inflation targets; (iii) Central Bank has transparency and high responsibility in implementing policies The characteristics and factors in general research are also three key factors that Mishkin (2014) want to mention is the independence of the Central Bank, the transparency of policies and the credibility of the Central Bank in the implementation policy

2.1.6.3 The goals of inflation targeting policy

According to Tram Thi Xuan Huong et al (2014), the inflation rate that the central bank aims to determine the expected inflation in the components of the economy and contribute to the stability of the macroeconomy

2.1.6.4 Conditions for applying inflation targeting policy

Vietnam is not ready to implement the current inflation targeting policy because the relationship between monetary policy instruments and inflation in Vietnam is not strong, unstable and unpredictable (Nguyen Thi My Phuong, 2016 ) In other words, in terms of the necessary and sufficient conditions for Vietnam to implement the inflation policy, it is immature (Hoang Hai Yen & Vu Thi Le Giang, 2011; Tran Hoang Ngan, Vu Thi Le Giang

& Hoang Hai, 2013)

2.2 Basic theories of the new Keynesian model

2.2.1 The overview of the New Keynesian theory

Kydland & Prescott (1982) provides a real business cycle model (Real Business Cycle - RBC) with a microeconomic foundation in which households optimize benefits with income constraints, profit maximization businesses in the binding on inputs such as minimizing costs based on capital constraints, labor, technology and social welfare maximization However, the RBC model also encountered some criticisms when only taking into account the supply shock (productivity shock) without considering the demand shock, in other words within the scope of the RBC model, the monetary policy has not to affect output and other macro variables

This seems to be difficult to convince economists as well as central banks, leading to the emergence of a new model that combines the RBC model and non-neutrality of the monetary policy in the short term such as the new Keynesian school These school-based models address policy questions such as assessing the impact of demand shocks, the role of monetary policy, ficsal policy marking the combination of the microeconomic and macroeconomic foundation The new Keynesian tissue and advanced estimation techniques The new Keynesian model classes in addition to retaining the micro - foundation add more nominal rigid factors (price, salary) - which

is the cause of the non-neutrality of monetary policy in the short term (Romer & Romer, 2000), as well as true

rigid factor (from capital adjustment costs) to explain the impulse response function (IRF) in empirical model research

The paper builds a model similar to the new Keynes models contributed by Clarida, Gali, and Gertler (1998,

1999, 2000), the main building blocks in all models include: (i) An IS equation illustrates the relationship between the output gap and real interest rates; (ii) A Phillips curve illustrates the relationship between inflation and the output gap; (iii) And the monetary policy rules are evaluated according to or derived from the loss function In addition, in order to expand the new Keynesian model for the open economy, consideration should be given to the influence of international commodity markets and international financial markets on the domestic economy

2.2.1.1 The New Keynesian model structure with 3 equations

According to Nguyen, D T (2016), the standard New Keynesian model includes: A New Keynesian

Phillips, an IS curve, and a Taylor rule (1993) Specifically in the empirical modeling for Vietnam, the new

Keynesian model is rewritten as follows:

2.2.1.2 The New Keynesian model structure with 4 equations

The study lists important logarithmic linear equations in the model (Gali & Monacelli, 2002; del Negro and Schorfheide, 2005; Lubik & Schorfheide, 2007) and is summarized by four equations: (i) equation IS curve, (ii) Phillips curve equation, (iii) monetary policy equation and (iv) trade terms equation combined with the equation

of world production and inflation variables (Nguyen Duc Trung & Nguyen Hoang Chung, 2017)

2.2.1.3 The model structure applied in Vietnam (developed by IMF)

In Viet Nam, Dizioli & Schmittmann (2015), the development of the Dynamic Stochastic General Equilibrium (DSGE) model for Vietnam is a new, small-scale Keynesian model inherited from the model (Berg et al., 2006, 2010, 2013) includes: (i) an aggregate demand equation (output gap estimated by HP filter), (ii) two Phillips curve equations (food and fuel + inflation (iii) an uncovered interest rate (UIP) equation and (iv) an equation for the monetary policy rule (Taylor rule and exchange rate target)

2.2.2 An SVAR new Keynes model

This study introduces the New Keynesian SVAR model of Vietnam’s economy The study used an estimation model to simulate the dynamic responses of the output gap, inflation, exchange rate and interest rate for four shocks: the aggregate demand shock, the aggregate supply shock, and exchange rate shock and monetary policy shock The model structure includes the IS curve equation based on representative optimization subject in

1 The output gap is defined as the difference between the actual output of the economy and its potential output

(Bank of Canada, 2012) This text can be found at: bankofcanada.ca – search for ‘backgrounders”

a small open economy, the new Phillips Keynesian curve (NKPC) derives from Calvo's (1983), the uncovered interesr rate parity (UIP), and monetary policy rule towards the future

t Et t xt t

2.2.2.3 Uncovered Interest Parity (UIP)

A standard feature in most small open economic models is the inclusion of uncovered interest rate balances

to describe the nominal exchange rate:

2.2.2.5 Rational expectations econometrics

According to Lucas (1976), expectations really play an important role in macroeconomics, altering previous traditional methods without recognizing the role of expectation adjusting to policy changes Sbordon et al (2010) with the application of the DSGE model in policy analysis, research results show that the most effective method

to control inflation is through managing the "expectation" factor rather than managing the effects of policy instruments (To Huy Vu & Nguyen Duc Trung, 2016) The way in which expectations are formed (the relationship

of expectations for information in the past) changes as the behavior of the forecast variable changes So when

policy changes, the relationship between expectations and information in the past will change due to economic behavior is affected by expectations, the relationship in the econometric model will change

2.2.3 A DSGE new Keynes model

2.2.3.1 The theory of DSGE model

DSGE model is a branch of application of general equilibrium theory DSGE theory tries to explain general economic phenomena, such as economic growth, business cycle and the effects of monetary policy and fiscal policy on the foundation of macroeconomic models deriving from microeconomic principles

According to Sbordone et al (2010), the DSGE model is built on the micro-foundation and emphasizes the choice of intermediaries agents Basically, the model focuses on the behavior of 03 main macro variables in the economy namely: Inflation, GDP growth, and short-term interest rates

Fig 2.5 The basic structure of DSGE models

Source: Sbordone et al (2010)

In Figure 2.5, three blocks (supply, demand and monetary policy equations) form a trio of triangles The

demand block defines the real output (y) as a function of the real expected interest rate variables (nominal interest rate minus expected inflation) or (i - πe) - and the real expected output (y e ) The straight line connecting supply and demand blocks show that the level of output (y) is an important input in measuring inflation (π) with expected future inflation (π e )

The determination of output and inflation from the demand and supply blocks to the monetary policy equation (dashed line) This equation describes the Central Banks setting nominal interest rates, often described as functions that represent inflation and real output By adjusting the nominal interest rate, the monetary policy changes the impact on real output and through inflation, which is represented by the relationship between monetary policy and demand and then supply The policy rules establish a circle, showing a perfect model with the

relationship between 3 endogenous variables: output (y), inflation (π), and nominal interest rate (i) One of the

basic characteristics of the DSGE model is the dynamic interaction between the three blocks - the dynamic aspect

of the DSGE model - in the sense that future expectations are the determinants of current results Accordingly, future output and inflation depend on the expectation of the present, the monetary policy of the future also depends

on the current policy actions

The basic feature of the DSGE model is the dynamic interaction between the blocks, the "dynamic" factor here means that the predictive factor for the future is the determining factor for the behavior at the present The model highlights the role of "estimation" and the dynamic interaction between blocks The impact of the expected factor on the economy is shown through the arrow from monetary policy to demand block and then to supply block when output and inflation are determined This emphasizes that monetary policy has a crucial impact on the

"expectation" factor

Finally, the sufficient conditions for building DSGE models include: (i) the first is the monopolistic competitive market; (ii) the second is the role of money (Wallace, 2011; Seitz & Schmidt, 2013); (iii) a regulatory authority on monetary policy with the control of economic shocks In addition, it is necessary to add the inertia factor of the shocks - the lag of shocks, consumer demand, investment, the change of the capital

2.2.3.2 The structure of the DSGE model

The structure of the DSGE model for opened, medium and large economies

According to the ECB, several key equations of the DSGE model developed by ECB are called New - Area Worldwide Model (NAWM) which has four types of economic subjects: Households, businesses, representative authority for monetary policy and fiscal policy

The structure of the DSGE model for opened, small economies

The general model consists of the following elements: (i) the IS curve equation, also known as the Euler equation, (ii) Phillips curve equation, (iii) the monetary policy is described in terms of interest rate rules, side Besides, the exchange rate is expressed through consumer price index and purchasing power parity (PPP)

The DSGE model with 3 equations

This is a system of 3 equations summarized by Nguyen Duc Trung (2016) similar to the new Keynes equation system presented in section 2.2.1.1 of this thesis

The DSGE model with 4 equations

According to Lubik & Schorfheide (2007), the current DSGE structure is built on the foundation of new Keynesian models The development of DSGE models is also expanded when taking into account market friction

or inefficient market losses in the labor market or financial market (this expansion is particularly significant after the global financial crisis 2008) For central banks, the application of the DSGE model is more popular, especially

in central banks pursuing the mechanism of the targeting inflation policy

2.2.3.3 The framework of policy analysis and theory of economic forecasting

Forecasting is a process of making judgments about the future based on past and present information, as well as trend analysis

The predictive results chain obtained in this study is the out-of-sample forecast For example, this involves

a person pretending to go back in time at time R in the sample set to size T and then using the data set that has been acquired by the time R to make the project report for time R + 1 Continue to use the data set to time R and forecast

data at the time of R + 1 to predict the time of R + 2 Repeat this process to get a sequence of P = T - R forecasts

and an out-of-sample error function respectively The accuracy of the forecast is then calculated by taking the average of the error function out – of - sample With the error function being square, the calculation of the accuracy

of this forecast is called the Mean Square Forecast Error (MSFE)

2.2.3.4 The variety of DSGE model

The study refers to the 5 model groups with the highest level of policy explanations including: (i) the Ramsey model (1928); (ii) the IS – LM, AD – AS model (Hicks, 1938); (iii) the Solow – Swan model (Solow & Swan, 1956); (iv) the Ramsey random model (RBC/ DSGE model) – King et al (1998) and (v) the New Keynesian model (Clarida et al, 1999)

In the scope of this thesis, a general study of the foundation for building the DSGE model according to the RBC and new Keynes theory

Trong phạm vi luận án này, nghiên cứu khái quát nền tảng xây dựng mô hình DSGE theo lý thuyết Keynes mới nhưng có khảo lược mô hình chu kỳ kinh doanh thực (Real Business Cycle - RBC) của Kydland và Prescott

(1982)

The real business cycle theory

The real business cycle theory (RBC) began to emerge in the early 1980s thanks to the important contribution of Kydland & Prescott (1982) This theory is based on Ramsey's neoclassical growth model, with important improvements being the study of real shocks (natural shock, technology shock ) that can cause periodic fluctuations in assumptions of the flexible price, wage

The new Keynes theory

The DSGE new Keynesian model inherits the micro-foundation from RBC and adds nominal rigidities from price and wage which focusing on solving problems related to Keynes's rigidity price hypothesis and building micro-foundations for these hypotheses

2.2.3.5 Frictions cost of DSGE model

The studies laid the foundation for the concept of financial friction in the DSGE model including Bernanke, Gertler & Gilchrist (1999) and Iacoviello (2005) According to Christiano, Eichenbaum & Evans (2005), the nominal and real frictions of nominal market friction are like sticky prices, sticky wages, and the changes of capital, the cost of adjusting capital and inheritance in the habit persistence during the estimation procedure

2.2.3.6 Advantage and disadvantage of DSGE model

The advantage

DSGE is not the only intensive model of personal behavior but models that have a clear microeconomic foundation with fundamental assumptions based on the optimization of economic representatives below the expectations

DSGE model is considered as a useful tool for quantitative policy analysis in macroeconomics and also a prominent tool for the Central bank's forecasting statistics This advantage is particularly suitable for Vietnam when the research database is not enough so that the sample is often short and measurement errors are a big problem