Abstract
We construct broad monetary condition index (MCI) for monetary policy management in Vietnam. MCI is composed of key monetary transmission variables including interest rate, exchange rate, credit and stock market price. Weights of composite variables are derived from reduced form IS-PC framework and impulse response function based on vector autoregressive model with data in first difference form and difference-with-long-term-trend form. The best MCI is chosen based on three criteria: its causal relationship with output growth, its ability to explain output growth in short-run and its out-of-sample performance in forecasting output growth. Movement of chosen MCI indicates that the indicator has two essential characteristics of a supporting index for short-term monetary policy management, including quick responses to monetary policy changes and close relation with policy goal.
Access this chapter
Tax calculation will be finalised at checkout
Purchases are for personal use only
Notes
- 1.
Previously, Vietnam has multiple policy goals including economic growth, price control,..., indicated in Law on The State Bank of Vietnam 1997.
- 2.
Such as Directive 02/2010/CT-NHNN, Directive 01/2011/CT-NHNN, Directive 01/2012/CT-NHNN, Directive 01/2013/CT-NHNN.
- 3.
The formula is adjusted from the original formula (which is \(MCI_t = \theta _r(r_t - r_0) + \theta _e(e_t - e_0)\)) to appropriate with direct exchange rate quotation used in the paper.
- 4.
We do not report estimation result of PC equation in the main contend of this paper.
- 5.
Including China, Singapore, Japan, Korea, Thailand, Malaysia, Hong Kong, The United State, Indonesia, Germany, Australia, UK, France, Russia, Philippines, Taiwan and Netherland.
- 6.
\({ REER}_t = \prod _{i=1}^{k}({ NER}_{it}\cdot \frac{P_{it}^*}{P_n})^{w_{it}}\) in which \({ NER}_i\) is nominal exchange rate of currency i against VND, \(w_i\) represent for attached trade weigh of currency i in currency basket, \(P^*_i\) represents for producer price index or whole sale price index of country i; \(P_n\) represent for consumer price index (CPI) of Vietnam.
- 7.
The authors use three methods including: reduced-form IS-PC model, IRF based on VAR and factor analysis with data in first difference form and difference-with-long-term form.
- 8.
The authors use IRF based on VAR and Dynamic factor model to calculated MCIs for 13 economies including China, Australia, HongKong, Indonesia, India, Japan, Korea, Malaysia, New Zealand, Philippines, Singapore, Thailand and Taiwan.
- 9.
We determine lag of growth without INDEXÂ to apply the same lag of growth into various equation estimation, therefore, SSRs of estimated equation can reflect explaining ability of INDEX.
- 10.
We also explore explanatory ability of other monetary variables to compare with that of calculated MCIs.
- 11.
We do not forecast at four steps ahead because all coefficient of MCIs at foure steps ahead are not significant as presented in Table 8.
- 12.
Previously reserve requirements were only applied to current deposits and under 24 month deposits.
- 13.
Exchange rate quoted at commercial bank is determined by published interbank exchange rate from SBV and fluctuation band.
References
Abdul Majid, M.Z.: Measuring monetary conditions in a small open economy: the case of Malaysia. J. Financ. Econ. Policy 4(3), 218–231 (2012)
Ball, L.: Policy Rules for Open Economy. National Bureau of Economic Research. NBER Working Paper 6760 (1998)
Bank of Canada: Monetary Conditions. Bank of Canada Review Autumn, pp. 18–20 (1994)
Batini, N., Turnbull, K.: A dynamic monetary condition index for the UK. J. Policy Model. 24, 257–281 (2002)
Bernanke, B.S., Gertler, M.: Inside the black box: the credit channel of monetary policy transmission. J. Econ. Perspect. 9(4), 27–48 (1995)
Bhattacharya, R.: Inflation Dynamics and Monetary Policy Transmission in Vietnam and Emerging Asia. IMF working papers WP/13/155 (2013)
Chote, R: IMF urges rate cut by Germany. Financ. Times 1, p. 1 (1996)
Davies, G., Simpson, J.: Summary. Int. Econ. Anal. (Goldman Sachs) 2, 3–18 (1996)
Duguay, P.: Empirical evidence on the strength of monetary transmission mechanism in Canada: an aggregate approach. J. Monet. Econ. 33(1), 39–61 (1994)
Eika, K., Ericsson, N., Nymoen, R.: Hazards in implementing a monetary conditions index. Oxf. Bull. Econ. Stat. 58(4), 765–790 (1996)
Ericsson, N.R., Jansen, E.S., Kerbeshian, N.A., Nymoen, R.: Understanding a Monetary Conditions Index. Mimeo, Federal Reserve Board (1997)
Freedman, C.: The role of monetary conditions and the monetary condition index in the conduct of policy. Bank Canada Rev. (1995)
Gauthier, C., Graham, C., Liu, Y.: Financial Conditions Indexes for Canada. Bank of Canada Working Paper 22 (2004)
Goodhart, C., Hofmann, B.: Asset prices, financial conditions, and the transmission of monetary policy. Paper prepared for the conference on Asset Prices, Exchange Rates, and Monetary Policy, Stanford University (2001)
Guamata, N., Nir, K. and Eliphas, N.: A financial condition index for South Africa. IMF Working Paper WP/12/196 (2012)
Hansson, B., Lindberg, H.: Monetary conditions index—a monetary policy indicator. Q. Rev. 3, 12–17 (1994). (Sveriges Riksbank—Swedish Central Bank)
Hoang, K.T.: Estimating the response of real output to monetary policy instruments shocks in Vietnam. University of East Anglia, Norwich Economic Papers (2009)
IMF: World Economic Outlook. International Monetary Fund, Washington (1996)
Khan, S., Qayyum, A.: Measures of Monetary Policy Stance: The Case of Pakistan. PIDE Working Papers 39 (2007)
Le, A.T.: Beyond inflation targeting: assessing the impacts and policy alternatives. In: Epstein, G.A., Yeldan, A.E. (eds.) Monetary Policy in Vietnam: Alternatives to Inflation Targeting, pp. 299–314. Edward Elgar Publishing Ltd, Cheltenham (2010)
Le, V.H.: VAR analysis of the monetary transmission mechanism in Vietnam. Appl. Econom. Int. Dev. 9(1), 165–179 (2009)
Margarita, D., Maria, S.G.: Financial condition index for Asean economies. ADB economics Working paper series 333 (2013)
Mayes, D.G., Viren, M.: Financial Conditions Indexes. Economia Internazionale/International Economics. Camera di Commercio di Genova 55(4), 521–550 (2002)
Modigliani, F.: Monetary policy and consumption: linkages via interest rate and wealth effects in the FMP model. In: Consumer Spending Money and Monetary Policy: The Linkages. Conference Series, pp. 9–84. Federal Reserve Bank, Boston (1971)
Nguyen, P. L.: Monetary transmission mechanism under quantitative analysis. Bank. Rev. 18, 19–27 (2010)
Osorio, C., Pongsaparn, R., Unsal, D.F.: A quantitative assesment of financial conditions in Asia. IMF Working paper WP/11/170 (2011)
Peng, W., Leung, F.: A monetary conditions index for mainland China. Hong Kong Monet. Auth. Q. Bull. 1, 5–14 (2005)
Pesaran, H., Shin, Y.: Generalized impulse response analysis in linear multivariate models. Econ. Lett. 58, 17–29 (1998)
Pham, M.: A Structural Vector Autoregression Model of Monetary Policy in Vietnam. Available at SSRN http://ssrn.com/abstract=2272604 or http://dx.doi.org/10.2139/ssrn.2272604 (2013)
Sims, C.: Macroeconomics and reality. Econometrica 48(1), 1–48 (1980)
Suttle, P.: Monetary Conditions Worldwide. World Financial Markets (JP Morgan), vol. 26 (1996)
Swiston, A.: A U.S. Financial conditions index: putting credit where credit is due. IMF Working Papers, No. WP/08/16 (2008)
Ta, Q.K.: Discussion on developing monetary market in Vietnam. Bank. Rev. 7, 5–7 (2004)
Author information
Authors and Affiliations
Corresponding author
Editor information
Editors and Affiliations
Rights and permissions
Copyright information
© 2015 Springer International Publishing Switzerland
About this chapter
Cite this chapter
Trinh, P.T.T., Kim, N.T. (2015). Broad Monetary Condition Index: An Indicator for Short-Run Monetary Management in Vietnam. In: Huynh, VN., Kreinovich, V., Sriboonchitta, S., Suriya, K. (eds) Econometrics of Risk. Studies in Computational Intelligence, vol 583. Springer, Cham. https://doi.org/10.1007/978-3-319-13449-9_27
Download citation
DOI: https://doi.org/10.1007/978-3-319-13449-9_27
Published:
Publisher Name: Springer, Cham
Print ISBN: 978-3-319-13448-2
Online ISBN: 978-3-319-13449-9
eBook Packages: EngineeringEngineering (R0)