Summary of phd thesis international economics monetary policy rule and the applicability in vietnam in the context of international economic integration

- The thesis has estimated modified the Taylor’s rule, the hybrid Taylor-McCallum’s rule interest rate tool with economic growth gap variable; modified the McCallum’s rule and the hybrid

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SUMMARY OF PHD THESIS

MONETARY POLICY RULE AND THE APPLICABILITY IN VIETNAM IN THE CONTEXT OF INTERNATIONAL ECONOMIC INTEGRATION

Major: International Economics Code number: 9310106

NGUYEN THI HONG

Hanoi – 2020

The Thesis will be defended in front of the Thesis Council meeting at

university level at Foreign Trade University

At hour date month year 2020

The Thesis can be found at the National Library and

the Library of Foreign Trade University

THE LIST OF PAPERS PUBLISHED

1 Nguyễn Thị Hồng, Nguyễn Thị Thùy Vinh, 2020, Kiểm định quy tắc điều hành chính sách tiền tệ của Việt Nam giai đoạn 2007 –

2016, Tạp chí Quản lý và Kinh tế quốc tế, Số 128, tháng 5/2020

2 Nguyễn Thị Hồng, Hồ Thị Diệu Linh, 2020, Thực trạng áp dụng

chính sách tiền tệ phi truyền thống ở Việt Nam, Tạp chí Quản lý và Kinh tế quốc tế, Số 126, tháng 2/2020

3 Nguyễn Thị Hồng, 2020, Quy tắc chính sách tiền tệ và thực tiễn vận

dụng của một số nước trên thế giới, Tạp chí Kinh tế Đối ngoại, Số

Tạp chí Kinh tế Đối ngoại, Số 110, tháng 10/2018

6 Nguyễn Thị Hồng, 2018, Chile’s monetary policy in an inflation

targeting framework, Kỷ yếu hội thảo khoa học cấp Trường Đại học Ngoại Thương: “Sustainable development in the Digital Era”, NXB

Bách Khoa, tháng 12/2018

7 Nguyễn Thị Thùy Vinh, Nguyễn Thị Hồng, 2017, Nghiên cứu quy tắc Taylor và quy tắc McCallum trong điều hành chính sách tiền tệ ở Việt Nam, Tạp chí Nghiên cứu Kinh tế, Số 1 (464), tháng 1/2017

INTRODUCTION

1 Rationale

The central banks have two choices in conducting monetary policy They may follow discretionary policy They may also comply with rules set out before Many studies confirmed that complying with a monetary policy rule brings many advantages over a discretionary policy such as: Ensuring consistency, minimizing fluctuations in output and inflation, Improving the transparency and accountability of the central bank,

There are many monetary policy rules, but the choice of rules and the way to follow them depend on each central bank In Vietnam, over the past years, the State Bank of Vietnam (SBV) has actively used monetary policy to moderate the economy However, in some periods, the SBV pursued many goals, which might not be achieved simultaneously; or the SBV moved between different targets just in a short time, which created the unreliability of the commitments of the monetary policy, affecting the effectiveness of the monetary policy due

to low ability to influence on the expectation, These lead to an increase

in costs for the implementation of monetary policy in the future

Vietnam's economy is now increasingly integrated to the world’s economy, so it is impossible for Vietnam’s economy to avoid external shocks To deal with these situations and pursue active and effective monetary policy in the long run, the SBV should follow rules However, most of studies of monetary policy rules in Vietnam paid attention to separate rule rather than hybrid ones, or did not compare between rules to find out optimal ones

Based on the above situations, I would like to chose the topic

“Monetary policy rule and the applicability in Vietnam in the context

of international economic integration” for my doctoral thesis

2 Objectives

The general objectives: study monetary policy rules and consider the SBV’s applicability of monetary policy rules on the condition of international economic integration

The specific objectives: theoretically systematize monetary policy and issues related to monetary policy rules; draw lessons from experiences in applying monetary policy rules of some central banks in the world; analyze the reality of conducting monetary policy in

Vietnam; estimate monetary policy rules for the SBV; consider the impacts of monetary policy tools on macroeconomic goals if the SBV follows the rules; propose the optimal rules and measures for the SBV

to successfully apply suggested rules

3 Scope of research

The thesis studies monetary policy rules and draws lessons from experiences in applying monetary policy rules of Federal Reserve (Fed), Bank of Japan (BOJ), Bank of Russia (CBR) and Central bank of Chile The thesis analyzes the situation of conducting monetary policy, tests monetary policy rules in Vietnam and evaluates the impact of monetary tools on macroeconomic goals if the SBV follows the rules in the period of Q1/2000 – Q4/2019 Then the thesis suggests the optimal rules for the SBV to 2025, vision to 2030

5 New scientific contributions

- Beside Taylor’s rule, the thesis examine both the McCallum’s rule and the hybrid Taylor-McCallum’s rule, on the condition of international economic integration

- The thesis has estimated modified the Taylor’s rule, the hybrid Taylor-McCallum’s rule (interest rate tool) with economic growth gap variable; modified the McCallum’s rule and the hybrid Taylor-McCallum’s rule (monetary base tool) with money supply M2 variable Moreover, the thesis uses lag variables in the above rules

- The quantitative results show that the SBV has not only followed the Taylor rule, but also the hybrid Taylor-McCallum rule (M2 tool) to reduce inflation rate, stabilize the economic growth and exchange rate

- After testing the rules, the thesis evaluates the impact of monetary tools in these rules on macroeconomic goals in the context of international economic integration

6 Research structure

Chapter 1: Theoretical framework and literature review on monetary policy rules

Chapter 2: The reality of conducting monetary policy in Vietnam in period of 2000 - 2019

Chapter 3: The estimation of monetary policy rules in Vietnam in the context of international economic integration

Chapter 4: The assessment of applicability and some suggestions for successful application of monetary policy rules in Vietnam in the context of international economic integration

CHAPTER 1: THEORETICAL FRAMEWORK AND LITERATURE REVIEW ON MONETARY POLICY RULES

1.1 Overview of monetary policy

1.1.1 Definition

Monetary policy involves the central bank’s decisions on using measures and tools to adjust money supply, interest rates and quantity

of credit to achieve macroeconomic goals

1.1.2 Targets of monetary policy

Goals: The final objectives that the central bank wants to achieve

such as price stability, high economic growth, high employment, interest rate stability, financial system stability, foreign exchange market stability,

Intermediate targets: The variables that the central bank can

accurately measure, timely control and have direct effects on goals, such as money supply, interest rate or exchange rate

Operating targets: The variables which are directly affected by the

central bank’s policy tools like monetary base, reserves, short-term interest rates

1.1.3 Tools of monetary policy

Indirect tools: Reserve requirements, refinancing instruments, open market operations (OMOs)

Direct tools: credit quota, interest rate or exchange rate control

1.2 Monetary transmission mechanism

1.2.1 Transmission channels

Interest channel: Money supply increase → normal interest rate

reduce → real interest rate reduce → investment increase → Aggregate demand (AD) increase → output and overall price level increase

Exchange rate channel: Money supply increase → domectic

currency devalue → trade balance increase → AD increase → output and overall price level increase

Asset price channel: Money supply increase → price of assets of

firms or households changed → investment and consumption increase →

AD increase → output and overall price level increase

Banking credit channel: Money supply increase → reserves of

banks increase → banks’ ability to provide credit increase → investment and consumption increase → AD increase → output and overall price level increase

1.2.2 Factors influencing monetary transmission

(i) Factors from international markets: exchange rate regime, capital flows, dollarization;

(ii) Factors related to the balance sheet of the banking system: assets

of the banks, liquidity level, the ratio of equity to total assets of the bank;

(iii) Factors related to the characteristics of financial system: level of competition of the banking system, the development of the financial market, the depth of intervention of entities in financial market;

(iv) Other factors: the central bank’s independence, the state budget deficit and the dominance of the fiscal policy, the asset balance sheet of enterprises and households

1.3 Impacts of international economic integration on monetary policy

1.3.1 The impacts on target of monetary policy

The open economy faces many internal and external shocks, so the macroeconomic stability becomes the top priority goal

1.3.2 The impacts of international economic integration on monetary policy tools

When the economy increasingly integrates into international economy, the central bank needs to gradually reduce using direct monetary tools and switch to using indirect ones

1.3.3 The impacts on monetary transmission channels

Interest channel: The efficiency of the interest rate channel reduces Exchange rate channel: The efficiency of the exchange rate channel

is greater

Asset price channel: The efficiency of the asset price channel

increases

Banking credit channel: The role of banking credit channel reduces

1.4 Overview of monetary policy rule and literature review on monetary policy rule

1.4.1 Overview of monetary policy rule

There are four original monetary policy rules namely Friedman's money supply growth rule (k% rule), Taylor's interest rate rule, McCallum's base money rule, and inflation targeting rule

1.4.2 Overview of theoretical studies on monetary policy rule

1.4.1 Friedman's rule

The money supply should be increased by a fixed percentage (k%) over time:

∆M = k = ∆P + ∆Y - ∆V

- Advangtages of k% rule: k% rule is simple and easy to apply

- Disadvangtages of k% rule: The effectiveness of the k% rule

depends on the stability of two variables, which are real output (Y) and velocity of money (V) In fact, both of these variables are highly volatile

- Conditions for applying k% rule: when the economy is stable (real

output and velocity of money are stable)

1.4.1.2 Taylor's rule

The original Taylor's rule states that monetary authority should adjust the policy interest rate whenever real inflation deviates from the target inflation and/ or real output deviates from the potential output:

i t = π t + r + α(π t – π*) + β(y t )

- Advangtages of Taylor's rule: The original Taylor rule is simple and

specific, it can be applied to achieve dual goals, economic growth in short run and price stability in long run Moreover, it helps the central

bank to increase accountability and transparency of policies

- Disadvangtages of Taylor's rule: The variables required to implement

Taylor's rule are not easily calculated directly, but can only be estimated, which may lead to inaccuracies in setting interest rate; The original Taylor rule does not take into account abnormal variables and other macroeconomic conditions that can affect interest rate beside inflation gap and output gap; The rule can only be appplied in stable economy When the economy experiences crisis or falls into unusal situation such

as the zero lower bound on interest rates (ZLB), the rule is no longer

useful

- Conditions for applying Taylor's rule: (i) output target and inflation

target are clearly delimiated; (ii) the economy does not fall into a severe recession and the nominal interest rate does not drop to 0%; (iii) the

economy has effective instruments to estimate potential output

- Advangtages of McCallum’s rule: McCallum’s rule attempts to take

into account the possibility of changes in both income and velocity of money The variables required to implement McCallum’s rule seem easier to measure than those required to implement the Taylor’s rule The rule can even be applied when the economy falls into deflation or faces ZLB

- Disadvangtages of McCallum’s rule: Taking into account the

changes in income and velocity of money may cause difficulties for policy makers to apply the rule; In the rule, the velocity of money is calculated based on the most recent average value, but when to calculate the recent average value is an unsettled question; Choosing unappropriate response coefficient of the base money to the nominal income gap may cause great effects to the economy

- Conditions for applying McCallum: (i) output target and inflation

target need not to be clearly delimitated, (ii) the economy faces changing velocity of money or falls into deflation, or even faces ZLB (iii) The economy does not has good tools to forecast macroeconomic variables

1.4.1.4 Hybrid Taylor – McCallum rule

Hybrid Taylor – McCallum rule may be formed in the following equations:

1.4.1.5 Inflation targeting rule

Inflation targeting rule states how much money supply should be adjusted to achieve inflation targeting rate:

∆M = π + ∆Y - ∆V

- Advantages of inflation targeting rule: There is no need to know the

equilibrium real interest rate or potential yield; The publication of inflation targeting rate is easier to understand than publication of other tools (such as money supply); Public and clear inflation targeting rate helps to gain public's confidence in the central bank's target,

transparency and accountability

- Disadvantages of inflation targeting rule: The rule does not specify

whether the central bank should measure the growth rate of output and the velocity of money in one period, or take the average values over a number of periods or predict them according to the trend; The prerequisites for applying the rule: inflation target is given priority over other targets, the central bank must be completely independent and not subject to any fiscal or political pressures, the economy has healthy and

developed financial system, flexible exchange rate regime,

- Conditions for applying inflation targeting rule: (i) The central bank

is independent from the government; (ii) The economy has good tools

to clearly define the monetary transmission mechanism and properly forecast the inflation rate, (iii) The government has balanced fiscal policy, the central bank does not print money to pay debts or finance

1.4.3.2 Taylor's rule

Fed: there are many studies such as Orphanides (2003), Judd and

Rudebusch (1998) Taylor (1993a), Taylor (2007), Romanchuk (2015);

Bernanke (2015);

BOJ: McCallum (2001), Ahearne et al (2002),

ECB: Lee and Crowley (2010), Nechio (2011),

Bank of England (BOE): Batini et al (2001); Danske (2011); Martin

and Milas, 2012,

Other central banks: De Brouwer and O’Regan (1997) estimate

Taylor rule for the Australian economy Esanov et al (2004); Korhonen and Nuutilainen (2017) do researches for CRB Mohanty and Klau (2004) estimate monetary rules for the case of India Shaari (2008) tests monetary rules for Malaysia’s central bank IMF (2012) conduct research for central banks of Indonesia and Phillipines

In the case of SBV: Nguyễn Thị Hương Liên (2010), Nguyễn Đức

Long and Lê Quang Phong (2012), Đặng Anh Tuấn (2013), Nguyễn Thanh Nhàn (2014), Nguyễn Thị Thùy Vinh et al (2016), Nguyễn Trần

Ân (2017), Phạm Thị Bảo Oanh (2017), Nguyễn Khắc Quốc Bảo et al (2018), Nguyễn Hà Thạch (2018, 2019),…

1.4.3.3 McCallum’s rule

McCallum (1987) examined how Fed adjust money supply McCallum (2001), Liu and Zhang (2007), Tuuli et al (2008) studied the case of the BOJ For People’s Bank of China (PBoC), there are some studies like Tuuli et al (2008), Liu and Zhang (2007), Burdekin and Siklos (2008) Esanov et al (2004), Korhonen and Nuutilainen (2017) examined CRB’s reaction Khakimov et al (2010) studied the case of the Turkish Central Bank,

1.4.3.4 Hybrid Taylor – McCallum rule

Kong (2008) tested Taylor rule (both original and backward-looking modified rule), McCallum rule and hybrid Taylor-McCallum rule for PBoC Mehrotra and Sánchez-Fung (2011) performed estimation with Taylor rule, McCallum rule, and hybrid Taylor-McCallum rule for 20 emerging markets in Africa, Asia, Europe and Latin America

1.4.3.5 Inflation targeting rule

There are many studies proving that inflation targeting policy positively affect to inflation and economic growth such as Vega and Winkelried (2005), Lin and Ye (2009), Bousrih (2013), Nguyen Thi Hong et al (2019) However, there are also studies point that the policy does not affect or negatively affect the economic growth such as Ball and Sheridan (2005), Lin and Ye (2007), Brito and Bystedt (2010), Kovalchuk (2012)

1.4.4 Research gaps

It seems that there is no foreign researcher investigating monetary rule for the case of Vietnam, while the domestic researchers mainly focus on separate rule, they do not pay much attention to hybrid rules or

do not compare between rules In reality, along with the interest rates, the SBV also uses money supply M2 tool to achieve macroeconomic goals Therefore, it is necessary to have new research that estimates not only Taylor rule but also McCallum rule and hybrid Taylor-McCallum rule with the addition of some variables, such as the exchange rate gap (to take into account international economic integration factor) Moreover, the new research carries out further estimation of those rules

by replacing output gap by economic growth gap

CHAPTER 2: THE REALITY OF CONDUCTING MONETARY POLICY IN VIETNAM IN PERIOD OF 2000 – 2019

The Vietnam economy was affected by 3 negative external shocks in the period of 2000 - 2019 Those were the 1997 Asian financial crisis, soared prices of goods and petroleum in the world’s market in 2007 -

2008 and the global financial crisis in 2008

To overcome the aftermath of the Asian financial crisis, in the period of 2000 - 2006, the SBV implemented expansionary monetary policy As a result, the policy helped the economy grow back, but it also caused inflation

When the world’s market prices of goods and petroleum soared in

2007 - early 2008, along with a sharp increase in foreign investment inflows (as Vietnam became an official member of the WTO), many monetary instruments are synchronously used by the SBV to reduce money supply However, the contractionary monetary policy was conducted inefficiently and passively, so the inflation target could not been achieved

Due to negative impacts of the global financial crisis in 2008, the economic growth decreased in the period of 2008 - 2011, the target growth rate did not reach, while inflation increased The SBV changed monetary policy very often, even intervened by many administrative tools, but the results were not as expected

From 2012 onwards, the monetary policy mechanism has strongly renovated toward more proactive The SBV has gradually shifted from adjusting money supply to adjusting interest rates Especially, since

2016, the SBV has switched to use the daily average interbank exchange rate The positive changes in conducting monetary policy have helped to reduce inflation rate sharply while the economic growth rate recover gradually

2.1 Period 2000 - 2007

2.1.1 Targets of monetary policy

Due to negative impacts of the Asian economic crisis, Vietnam's economy experiences recession in 1999 The economic growth rate was only 4.8% and inflation was only 0.1% Therefore, in the period of

2000 - 2007, monetary policy focused on recovering economy

2.1.2 Tools of monetary policy

2.1.2.1 Reserve requirement

In order to achieve the top priority goal of recovering the economy and overcoming the consequences of the Asian financial crisis, the SBV performed expansionary monetary policy through gradually reducing requirement reserve ratio in 2000 – June 2004 By July 2004, the inflation rate increased back, the SBV raised requirement reserve ratio to control inflation In 2005 - 2006, the SBV kept requirement reserve ratio constant However, in 2007, to prevent rapid credit growth and high inflation rate, the SBV doubled requirement reserve ratio compared with that in 2006

2.1.2.2 Refinancing instruments

In 2000 - 2002, the inflation was low, the SBV reduced refinancing interest rate as well as discount interest rate and then kept them at low level Since 2003, the SBV has gradually formed an interest rate frame

to guide the market interest rate Accordingly, refinancing interest rate became interest rate ceiling and discount interest rate became interest rate floor in interbanking market

Because of high inflation in 2004, the SBV increased policy interest rates 3 times to control inflation in 2005 These interest rates remained unchanged in the 2006-2007 period

2.1.2.3 Open market operations

OMOs started operating in July 2000 it is continuously improved and becoming a regular monetary tool of the SBV In the period of

2000 – 2007: volume and number of transactions were increasingly, transaction terms are diversified, payment times were shortened, number of member was increasingly

2.1.2.4 Credit quota

In the period of 2000 - 2006, the SBV did not use credit quota In

2007, when inflation increased, the SBV required commercial banks

to implement measures to control credit volume and keep ratio of credit for investment and securities market to the total credit less than 3%,

2.1.2.5 Interest rate control

From August 5, 2000, the SBV removed the interest rate ceiling mechanism and switched to prime interest rate mechanism The SBV announced prime interest rate and amplitude, commercial banks set lending rates based on the prime interest rate plus amplitude

Since June 2001, commercial banks could decide interest rates for lending and borrowing foreign currency Since June 2002, commercial banks were allowed to apply the negotiable interest rate mechanism for lending VND From February 2007, the interest rate ceiling for USD deposit was removed and negotiable interest rate mechanism was applied because of pressure of appreciation in domestic currency when Vietnam joined the WTO

2.1.2.6 Exchange rate

In 2000 - 2007, the nominal value of VND against USD almost continuously reduced, except for some very short periods Therefore, the SBV raised the interbank exchange rate The exchange rate amplitude was adjusted up to 3 times Specifically, it was being expanded in two directions from +0.1% to ± 0.25% since July 1, 2002;

to ± 0.5% since December 31, 2006 and to ± 0.75% since December 24,

2007

2.1.3 Results of monetary policy

In the period of 2000 - 2007, expansionary monetary policy contributed much to economic growth However, the expansionary monetary policy coupled with the expansionary fiscal policy created pressure to increase price in 2004 and some next years

2.2 Period 2008 - 2011

The economy faced instability and complicated situations due to the negative impacts of the global economic crisis in 2008 Economic

recession associated with inflation risk brought difficulties to the SBV

in conducting monetary policy, many conflict policies were enacted in a short period

2.2.1 Targets of monetary policy

In early 2008, in the context of high inflation and trade deficit, the Government planned to prioritize stabilizing prices and achieving reasonable economic growth rate However, in late 2008, due to the impacts of the world’s economic recession, the Government tended to expanding policies to prevent the domestic economy from recession From 2009 to Q3/2010, expansionary monetary policy was continuedly implemented to persue economic growth But, in Q4/2010 – 2011, inflation increased, the SBV had to reduce inflation rate and stabilize the economy

2.2.2 Tools of monetary policy

2.2.2.2 Refinancing instruments

Owing to economic instabilities In 2008, the SBV had changed policy interest rates up to 8 times In the period of 2009 - Q3/2010, the SBV reduced refinancing interest rate and discount interest rate to boost the economy However, during period of Q4/2010 – 2011, the SBV raised policy interest rates to prevent high inflation

2.2.2.3 Open market operations

In theory, in 2008 - 2011, when the economy faced with high inflation, the SBV should use OMOs tool to reduce money supply However, in reality, commercial banks faced with low liquidity, so the SBV mainly expanded money supply to finance commercial banks

2.2.2.5 Interest rate control

Due to high inflation in 2007, after a long period of interest rate liberalization, in 2008, the SBV returned to control the interest rate through interest rate ceiling and prime interest rate The SBV has changed the prime interest rate up to 8 times In 2009, the SBV both lowered the prime interest rate and provided 4% interest rate subsidy for firms and households to produce goods and services

In 2010, commercial banks allowed to negotiate interest rate with customers In 2011, the lending interest rate increased, the SBV applied mechanism of interest rate control to stabilize monetary market The SBV regulated maximum interest rate level for deposits and loans

2.2.2.6 Exchange rate

To cope with the fluctuation of the exchange rate, from March 2008

to March 2009, the SBV widened the exchange rate band 4 times from

± 0.75% (December 24, 2007) to ± 1% (March 10, 2008), then ± 2% (June 27, 2008), ± 3% (November 6, 2008) and ± 5% (March 24, 2009) In addition, the SBV implemented a series of other measures such as tightly supervising foreign currency exchange agents, enhancing communication and announcing Vietnam's foreign exchange reserves,

From November 2009 to 2011, the SBV gradually reduced exchange rate band (from ± 5% in 2009 to ± 1% by the end of 2011) The SBV also set a target, which committed to increasing exchange rate less than 1% in 2011 and 1%-3% in the following years, to prevent expectation

of VND devaluation

2.2.3 Results of monetary policy

In 2008 – 2011, it can be said that the monetary policies were confused and passive The SBV frequently changed its policy to cope with abnormal fluctuations in the economy, the SBV even had to use administrative tools However, the results were not as expected, the economic growth rates were low, while inflation rates were high and far from the target levels

2.3 Period 2012 – 2019

In 2012 – 2019, the improvement in the monetary policy helped to reduce inflation rate from 18.13% in 2011 to 0.63% (the lowest level since the global economic crisis) in 2015 and remained it at less than

4% in recent years Economic growth rate gradually recovered, from 5.03% in 2012 to the highest level of 7.08% in 2018

2.3.1 Targets of monetary policy

For the intermediate target, along with money supply M2, the SBV has used interest rates as an intermediate target of monetary policy since 2012

For the goals, in 2012, the SBV committed to maintaining low inflation rate in the short, medium and long-term, avoiding the situation

of pursuing short-term goals (such as economic growth) and abandoning the long-term goals In the following years (2013 - 2019), the SBV planned to conduct monetary policy proactively, flexibly, and well coordinated with the fiscal policy to keep inflation rate low and the economy stable

2.3.2 Tools of monetary policy

2.3.2.1 Reserve requirement

In the period of 2012 - May 2019, the economy was more stable than it was in the previous period, inflation fell sharply, so reserve requirement ratio was unchanged

However, on May 29, 2019, the SBV reduced the reserve requirement ratio to 0% for VND deposits and foreign currencies deposits at People's Credit Funds, microfinance institutions, but increased reserve requirement ratio for demand or short-term deposits

in VND at the Vietnam Bank for Agriculture and Rural Development (Agribank) and the Cooperative Bank from 1% to 3%

2.3.2.2 Refinancing instruments

In achieve the target of economic growth, the SBV simultaneously reduced the policy interest rates Specifically, the refinancing interest rate was adjusted from 15% (in 2012) to 6.5% (in 2014) The discount interest rate was adjusted from 13% (in 2012) to 4.5% (in 2014) Under the condition of low and controllable inflation rate at the target of 4%, On July 10, 2017, the SBV decreased policy interest rates

by 0.25% to promote the economy On September 12, 2019, it continued to lower the policy interest rates by 0.25% because the world’s economy faced with a lot of uncertainties and difficulties, many central banks in the world have been reducing their policy interest rates

2.3.2.3 Open market operations

In 2012 - 2019, commercial banks' liquidity in VND were improved and sometimes redundant, the interbank interest rates were fallen, inflation rate tended to reducing, so the SBV carried out both purchasing and selling transactions to stabilize the money market

2.3.2.4 Credit quota

From 2012 onwards, the SBV has allocated and controlled credit growth rate for each commercial banks according to the following criteria: quality of liabilities, assets, capital level, and management capacity, risk management, human resource and compliance with regulations The SBV might adjust the credit quota for each year according to market conditions

2.3.2.5 Interest rate control

In 2012, the SBV lowered the borrowing interest rate ceiling 5 times, from 14%/year to 13%/year (13th March), then 12%/year (11th April), 11% (28th May), 9% (11th June) and finally 8% (24th December) Besides, the SBV issued regulations on lending interest rate ceiling for short-term loans in VND for priority areas

In 2013 - 2014, the SBV continued to reduce the borrowing interest rate ceiling to boost production and consumption In 2015, the SBV unchanged borrowing interest rate ceiling for deposits in VND but lowered borrowing interest rate ceiling for individuals’ deposits in USD from 0.75%/year to 0%/year to reduce the dollarization This level was kept stably in the period of 2016 - 2018 On November 19, 2019, the SBV cut the borrowing interest rate ceiling by 0.2 - 0.5% for demand deposits in VND or deposits in VND with terms of less than 6 months

2.3.2.6 Exchange rate

In the years of 2012 - 2014, the exchange rate was only adjusted once

a year But in 2015, due to the global economic fluctuations, the devaluation of the Chinese Yuan (CNY) and the expectation of increase

in Fed fund rate at the end of 2015, the SBV had to devalue VND 3 times

in 2015 at 1%/time Besides, in August 2015, due to deep devaluation in CNY, the SBV adjusted the exchange rate amplitude from ± 1% to ± 2% (12th August) and to ± 3% (19th August)

From January 4, 2016, the SBV implemented the daily average interbank exchange rate mechanism The daily average interbank exchange rate is determined by 3 main factors: (1) the daily average