INTRODUCTION
RELEVANCE AND BACKGROUND OF STUDY
Since the financial reforms of the early 1990s, Vietnam has undergone significant changes in its banking sector, particularly with the restructuring of state-owned commercial banks (SOCBs) and the emergence of joint-stock banks (JSBs) This transformation has led to a notable increase in the country's monetization, with the M2 to GDP ratio rising from 25% in the mid-1990s to over 70% by 2004 In that same year, SOCBs accounted for 73% of total credit, highlighting their dominant role in the financial system While SOCBs provided loans to both the private and public sectors, JSBs and smaller banks primarily focused on lending to the private sector, resulting in a segmented credit market.
Vietnam's accession to the World Trade Organization (WTO) has resulted in a significant increase in foreign direct investment and portfolio inflows, highlighting the impact of globalization on its economy However, this growth has also presented challenges, particularly an unfavorable balance of payments, which remains a major concern Since 2000, Vietnam's financial sector has experienced explosive growth, especially during the 2007-2008 period, leading to an overheated credit market.
50 percentage in January 2008, that contributed a positive element to inflation rising, got 14 percentage at this time (Ishii, 2008) And at early months of year 2011, Vietnam’s inflation rate accelerated to
13.89 percent in March, peak out at highest in 25 months Moreover, the trade gap increased to $1.15 billion that month after look over $1.11 billion in February (S&PReporting, 2011).
PROBLEM STATEMENT
Economic models often simplify the impact of financial conditions on the economy by focusing on a limited set of financial variables These typically include short-term risk-free interest rates and long-term government bond rates (Hall, 2001).
As financial systems have evolved significantly in recent years, their impact on the economy has become increasingly complex, making it challenging to identify the root causes of economic issues For instance, the 2008 global financial crisis originated from problems in the credit sector, particularly the mortgage asset crisis in the U.S and the capital flight from Vietnam's security market, which were influenced by prior easing of monetary policies Historically, economists like Pintinkin, Gurley, and Shaw have highlighted the crucial role of financial intermediaries and credit markets Modigliani and Papademos (1977) acknowledged that traditional monetary theories often overlook the functions of these intermediaries, with Gurley and Shaw (1956) asserting that credit supply has a more significant impact than money supply Consequently, the credit channel plays a vital role in shaping the decisions of policymakers.
Understanding the role of the credit channel in the financial market is essential for policymakers, as it plays a critical part in the transmission of monetary policy Identifying how the credit channel functions within monetary transmission is vital for improving existing policies, ultimately contributing to the achievement of national economic objectives.
This study aims to identify the role of credit channel in Vietnam’s monetary transmission mechanism, specify 1996-2010 period Following the main objective, the thesis:
- To analyze whether past value of credit helps predict the money supply;
- To examine the impact of credit shocks on money supply, also other macro economies;
- To test whether credit shock plays important role in forecasting the error of money supply.
RESEARCH QUESTION
' To obtain the above objectives, this thesis will attempt to answer the following questions:
What is the role of credit channel in the monetary policy transmission in Vietnam case over the period 1996-2010?
- Does the past value of credit help predict money supply?
- How does money supply reaction to credit shock?
- Whether credit shocks plays important role in forecasting money supply’s error? 1.5 METHODOLOGY
To carry out above objectives, this study uses quarterly data from 1996:Ql to 2010:Q3 Econometric techniques and descriptive statistic will be employed as primary quantitative in this research.
Descriptive statistical analysis provides a comprehensive overview of all variables used in this thesis, including their distribution, variation, and central tendency for both original and modified data, allowing for an initial assessment of data quality The study employs vector autoregression (VAR) econometric techniques to address key research questions related to time series data A unit root test is conducted to check the stationarity of all variables, ensuring the validity of the I-test and F-test Optimal lag lengths for the VAR model are determined using various criteria to identify the best-fitting model The Granger causality test is utilized to explore whether past credit values can effectively forecast money supply Additionally, impulse responses and variance decompositions serve as key techniques within the VAR framework to address the final two research questions The empirical findings ultimately elucidate the significance of the credit channel in the monetary transmission process in Vietnam.
STRUCTURE OF THESIS
The study is organized as following:
Chapter 1 introduces the importance of thesis, relevance and back ground of study, the objectives and research questions And the methodology is presented as briefly in this part.
Chapter 2 demonstrates the literature review Firstly, credit channel theory is mentioned as a core of study Secondly, empirical studies about the role of credit channel in monetary policy transmission are presented In addition, the chapter gives overview the Vietnam’s monetary policy framework, in which focuses on the credit market.
Chapter 3 presents analytical framework, then develop the model which helps us answer key question Finally, data description as well as steps of economic techniques will be mentioned in this chapter.
Chapter 4 shows the empirical results and discussion Finally, results comparison is also presented in this part.
Chapter 5 give conclusion, suggests some practical policy implications, and discusses the limitations and direction for further studies.
LITERATURE REVIEW
CREDIT CHANNEL THEORY
Credit channel theory highlights the presence of an external finance premium, primarily arising from the principal-agent problem between lenders and borrowers Benanke and Gertler (1995) elaborated on this concept through two key linkages: the bank lending channel and the balance-sheet channel This thesis will explore these two linkages, which are essential to understanding credit channel theory.
The bank lending channel concentrates the variability of loan supply through deposit institutions caused by the effect of monetary policy actions.
Banks play a crucial role as primary information sources in the economy, effectively addressing issues of asymmetric information and other distortions in credit markets This is particularly significant for small and medium-sized enterprises, which heavily rely on bank credit As long as this function persists, the bank lending channel will continue to be vital in the transmission of monetary policy.
When the government implements an expansionary monetary policy, it boosts bank deposits and reserves, which in turn increases the availability of bank loans This rise in loans stimulates investment, ultimately leading to an increase in overall output.
Tightening monetary policy reduces bank reserves and customer deposits, resulting in a lower availability of bank loans This decrease in loan availability leads to reduced investment spending and ultimately results in a decline in output.
Another side of credit view, when we mention to the impact of monetary policy to enterprises, small firms suffer bad effects on expenditure than large firms (Mishkin,
In 1996, it was noted that small companies are more reliant on bank loans for their financing needs, while larger companies have the advantage of accessing substantial capital through stock and bond markets, making bank loans less essential for them.
Balance sheet channels focuses influence of monetary policy changing on borrower’s balance sheets and income statement.
Fluctuations in monetary policy can significantly impact a company's balance sheet, leading to increased adverse selection and moral hazard issues when banks extend loans Borrowers with lower equity are more likely to engage in risky projects, raising the likelihood of loan defaults and potentially causing bank failures As banks respond to declining net worth by demanding more collateral, adverse selection problems intensify, ultimately reducing available funds for investment and curtailing overall lending.
Expansionary monetary policy positively impacts a firm's balance sheet by increasing equity stakes, reducing adverse selection and moral hazard issues This leads to a higher firm valuation and greater access to capital for investments, ultimately boosting aggregate demand.
In other way, lower interest rates by the reason of expansionary monetary policy also cause the firm’s balance sheet reformation because of the effect of cash flow.
Therefore, adverse selection and moral hazard problems can be lessened As a result, capital available for loan will increase, investment spending growth, aggregate output increment finally.
Monetary expansion leads to unexpected increases in price levels, enhancing companies' net worth while reducing issues related to adverse selection and moral hazard This process stimulates higher investment spending and boosts overall aggregate output.
Contractionary monetary policy leads to a decrease in equity prices and cash flow, resulting in a lower net worth for businesses This decline exacerbates issues related to adverse selection and moral hazard, ultimately reducing financing for investment and consumption.
2.2 MONETARY POLICY FRAMEWORK OF VIETNAM
The State Bank of Vietnam (SBV), as defined by the "Law on the State Bank of Vietnam," serves as the central bank and government body of the Socialist Republic of Vietnam It operates under the oversight of the National Assembly and the government, which are responsible for decisions related to monetary policy The government prepares plans, including annual inflation projections, and determines the liquidity to be injected into the economy Additionally, the government must report on the implementation of monetary policy to the National Assembly The SBV's role includes executing the government's monetary policy, managing state monetary and banking activities, and acting as the currency issuer, credit institution bank, and government bank These functions aim to stabilize currency value, preserve banking operations, and align with the country's socialist economic growth objectives.
According to SBV Law, the State Bank of Vietnam (SBV) functions as an entity of the Vietnamese government, with the National Assembly significantly influencing monetary policy decisions This strong government and National Assembly intervention in monetary policy implementation highlights the limited independence of the SBV in its operational instruments (Camen, 2006).
2.2.2MONETARY POLICY STRATEGY AND INSTRUMENTS
Vietnam's monetary policy strategy is derived from its five-year Social and Economic Development Plan, with the government responsible for creating an actionable implementation plan This includes setting targets for liquidity injection into the economy, as well as determining key metrics such as M2, credit, and deposit levels, which are essential components of the government's strategy (Camen, 2006).
The State Bank of Vietnam (SBV) sets annual targets for total liquidity and credit in alignment with macroeconomic and monetary objectives Each year, the SBV prepares a report detailing the implementation of its monetary policy and forecasts for the upcoming year This report is then submitted to the government for consideration and approval, before being forwarded to the National Assembly, following consultations with the National Monetary Policy Advisory Board.
Regarding to monetary instruments, a number of indirect tools have been introduced include reserve requirement, refinancing, discount financing facilities, open market operation and foreign exchange interventions.
SBV has applied reserve requirement in various forms since 1990s This instrument proves its important role on money market regulating in past Currently, required
The National Monetary Policy Advisory Board (NMPAD) includes key figures such as the Governor of the State Bank, the Minister of Finance, and various experts Reserves are categorized based on deposit maturity, the bank's sectoral focus, and the type of currency deposits, whether domestic or foreign Short-term deposits, typically under one year, yield higher returns compared to long-term deposits, and banks receive interest subsidies when providing credit to the agricultural sector or the People Credit’s Fund (Camen, 2006).
In 2008, the State Bank of Vietnam (SBV) utilized reserve requirements as a key strategy to combat inflation amid significant domestic and international economic fluctuations In February of that year, the SBV increased the reserve requirement ratio by 1 percentage point for both local and foreign currency deposits across most credit institutions However, in response to the economic downturn, the SBV reduced the required reserve for VND deposits under 12 months twice in 2009, lowering it from 6% to 5% and then to 3% Notably, the Vietnam Bank for Agriculture and Development saw a decrease from 3% to 2% and eventually to 1%.
EMPIRICAL LITERATURE
Recent empirical studies have increasingly focused on the role of credit in the transmission of monetary policy This topic was initially highlighted by Bernanke and Blinder in their influential 1988 paper, "Credit, Money and Aggregate Demand."
The IS/LM model serves as a straightforward tool for measuring the variance of money demand shocks Researchers introduced the CC (commodities and credit) curve, shaped similarly to the IS/LM curve, to evaluate the impact of the credit channel via bank lending during these shocks By analyzing two sub-samples (1974:1-1979:3 and 1979:4-1985:4), they found that the variance of money-demand shocks was significantly smaller than that of credit-demand shocks in the first sub-period, while the latter became more significant in the 1980s.
The role of the credit channel in monetary transmission has been a topic of interest since Ben Bernanke's seminal paper, prompting Rainey (1993) to investigate this relationship further Utilizing a monthly sample of American data from 1954 to 1991, Rainey aimed to determine the relative significance of the money and credit channels within the monetary transmission mechanism To conduct a comprehensive analysis, he employed a dynamic stochastic general equilibrium model, incorporating eight key variables: industrial production, M1, M2, bank loans, the Federal rate, the 6-month commercial rate, the 3-month Treasury rate, and the inflation rate.
As the result, he denied the role of credit channel when concluded money channel is much more important than credit channel in direct transmission policy shock during that time.
Bemarke and Gertler (1995) emphasized the significance of the credit channel as a crucial element within the economic "black box." They detailed two key linkages of the credit channel: the bank lending channel and the balance sheet channel Subsequent studies have adopted this framework as a primary focus for examining the role of credit in the economy To analyze responses to policy shocks, researchers effectively utilized the vector autoregression method Their findings highlighted that the credit channel could reveal substantial costs associated with the capital effects characteristic of the pure neoclassical model.
In his 1999 investigation of Korea's financial crisis, Kim examined the significance of the credit channel in the transmission of monetary policy Utilizing monthly data from January 1993 to May 1998, he employed a combination of three methodologies, including a narrative approach and disaggregated bank analysis, to assess the impact of credit on economic dynamics during this period.
'Bernanke and Blinder had treated monetary transmission mechanism was “black box” in journal
The study utilized a disequilibrium model to examine the bank lending channel, employing standard vector autoregression for econometric specification The findings revealed compelling evidence of the significant impact of the credit channel in the aftermath of the financial crisis, highlighting the importance of loan supply in economic recovery.
Over the years, numerous researchers have examined similar topics, leading to diverse results due to the varying characteristics of different countries In contrast to previous empirical studies, Warner and Georges (2001) introduced a unique approach to testing the credit view of monetary transmission by analyzing stock market returns They specifically estimated the abnormal returns for the daily stock market performance of common shares in U.S manufacturing.
, firms Research’s finding showed that there was no consistent relationship between abnormal stock returns and credit constraint both two periods (recessionary: 1990-
In their empirical studies, researchers have explored the lending channel's effectiveness in various economies Suzuki (2004) found that the lending channel is less influential in Australia from 1985:Q1 to 2000:Q2 due to specific characteristics of Australian banks Conversely, Lown and Morgan (2002) and Disyatat and Vongsinsirikul (2003) examined credit effects in the U.S and Thailand, respectively Lown and Morgan utilized bank commercial credit standards as a proxy for credit availability and employed a vector autoregression (VAR) model to analyze the impact of credit standards on the U.S economy Their findings highlighted the significant role of commercial credit standards in influencing both loans and economic output Similarly, Disyatat and Vongsinsirikul applied VAR methodology to investigate credit dynamics in Thailand.
The economists who supported the view: bank loans play important role in monetary policy transm ission
4 Lown and Morgan (2002) treated credit effect as mystery.
This study analyzes three key variables of the Thai economy—real output, the Consumer Price Index (CPI), and the 14-day repurchase rate—over the period from Q1 1993 to Q4 2001 to assess the effectiveness of money market transmission to the private sector The findings indicate that investment is significantly influenced by monetary shocks, highlighting the crucial role of banks as essential facilitators in the implementation of monetary policy.
Charoenseang and Manakit (2006) examined the changes in Thailand's financial environment following the implementation of inflation targeting and found that between June 2000 and July 2006, the credit channel played a more significant role in the transmission of monetary policy than the interest rate channel This finding highlights the reliance on capital sources for driving economic activities during this period.
on bank lending in Thai financial market Once again, the authors confirmed the important role of commercial bank lending in Thai economy.
In the same year, Podpiera (2007) had employed commercial banks data to study the impact of monetary policy shocks on loan market in Czech case; meanwhile Kubo.A.
In 2007, research on the monetary transmission mechanism in Thailand emphasized the significance of the credit channel, supported by empirical studies Podpiera utilized the Kashyap and Stein model with balance sheet data from Czech banks, revealing that changes in monetary policy influenced loan growth rates during the period of 1999-2001 Similarly, Kubo employed a structural vector autoregression (SVAR) analysis to assess the impact of exogenous monetary policy shocks on domestic macroeconomic variables, using monthly data from May 2000 to December 2006, which included the consumer price index, industrial production, producer price index, inter-bank overnight lending rate, and private credit aggregates The findings highlighted that the Bank of Thailand's success was significantly driven by the credit channel during that period.
24 negative movement effects on import demand when examined the impact of monetary policy shock on international variables in SVAR system.
Balazs Egert (2009) examined the effectiveness of research on the monetary transmission mechanism, focusing on Central and Eastern Europe The study revealed that a decrease in the inflation rate significantly contributed to the diminishing degree of exchange rate transmission over time It identified the credit channel as a crucial component of monetary policy transmission, while the asset price channel was found to be less influential in the context of stagnant stock and bond markets Similarly, the work of Fiorentini and Tamborini (2001) highlighted related issues in Italy.
policy makers when realized the importance role of credit supply during past decade’s research.
This study aims to analyze the monetary policy transmission in India, utilizing a VAR model alongside key macroeconomic variables such as the bank rate, repo rate, and reserve repo rate The previous research by Abdul (2009) highlighted the significant role of the bank lending channel in the effectiveness of monetary policy.
The transmission of monetary policy to India's economic activities is significantly influenced by the Federal Reserve's interest rates, particularly in the context of monetary shocks affecting emerging economies like India A recent study by Catao and Pagan (2010) utilized an expectation-augmented SVAR model to analyze monetary transmission in Brazil and Chile, relying on data from the IMF's International Financial Statistics (IFS), the Brazilian Planning Ministry Research Institute (IPEA), and the Central Bank of Chile Their findings highlighted the critical role of the bank-credit channel in emerging markets, demonstrating how incorporating key structural features into their model enhanced the understanding of credit shocks and their typical impact.
robust effects on output and inflation, especially in Chile where the penetration in
Research on the role of credit in monetary policy transmission in Vietnam is limited, with notable contributions such as Hung and Pfau (2008), who analyzed the monetary transmission mechanism using a vector autoregression (VAR) approach Their study revealed a weak connection between monetary policy and its channels in Vietnam, highlighting that the credit and exchange rate channels are more significant than the interest rate channel.
MODEL SPECIFICATION
To achieve the thesis objective, a Vector Autoregression (VAR) model will be constructed to investigate the significance of the credit channel in the transmission of monetary policy within the context of Vietnam.
According to Stock and Watson (2001), Vector Autoregressions (VARs) can be categorized into three types: reduced form, recursive, and structural This thesis employs the VAR approach, specifically focusing on the reduced form, as it offers a convenient method to achieve its objectives.
A reduced form represents each variable as a linear function of its own historical values and the historical values of all other variables This approach allows for the derivation of a reduced form of the VAR model.
Where: t = 1, ,T denotes time; ×t is an in-dimensional vector of endogenous variables
& (L) denotes vector polynomial of lag operator with optimal lag order;
E, is assumed to be vector white noise residual.
In regression analysis, the error term (tt) represents the unpredicted fluctuations in the variables after considering their past values Each equation is estimated independently using ordinary least squares, and various methods are employed to determine the optimal number of lagged values.
This thesis utilizes quarterly data from 1996:Q1 to 2010:Q3, reflecting the unique data accessibility challenges in Vietnam The selected macroeconomic variables include M2, the consumer price index, domestic credit, real industrial output, refinancing rates, and lending rates Table 3.1 provides detailed definitions and sources for these variables This concise yet comprehensive set of variables effectively captures the macroeconomic landscape of Vietnam, driven by several motivations for their selection.
According to Romer and Romer (1990), a decrease in reserve quantities results in reduced loan availability, a situation exacerbated by contractionary monetary policy In the context of Vietnam, M2 is selected as a key measure of money supply and policy shocks Additionally, the refinancing rate serves as an important tool for the State Bank of Vietnam to implement tighter monetary policy (Hung and Pfau, 2008).
The customer price index plays a crucial role in assessing inflation, which serves as a key predictor for economic output To effectively measure domestic loan supply, it is essential to incorporate domestic credit variables into the model Additionally, the lending rate is a significant factor in the policy transmission mechanism While GDP is commonly used to gauge a country's economic growth, Vietnam only has GDP data available since 2000; therefore, real industrial output will be utilized as a proxy for GDP This approach was also adopted in the empirical study by Hung and Pfau (2008) using a VAR model to analyze monetary transmission in Vietnam It is important to control for spurious regression among all variables, as Asteriou and Hall (2007) noted that most macroeconomic time series are non-stationary and exhibit trending behavior.
An empirical study by Lown and Morgan (2002) investigated the role of the credit channel in the U.S economy, categorizing the loan market into two scenarios: a classical market characterized by quantity and price, and an augmented market that incorporates credit This framework will be applied to the Vietnamese context, where the classical market consists of factors such as the customer price index, money-quasi, industrial output, refinancing rate, and lending rate, while the augmented market includes credit as a proxy for loan supply or domestic credit to the economy.
DATA SOURCES
According to IFS’s definition in 2009, M2 comprises money (MI) and saving, time deposit in national currency and demand deposits in foreign currency, other than those
• of the central government, with other depository corporations.
CP7 denoted consumer price index The indices are calculated by 37 largest provinces that presenting 8 economic regions and the weights is derived from the
2004 Vietnam Household Living Standard Survey (IMF world and country noted, 2009).
CREDIT denoted domestic credit It is the sum of credit to the nonfinancial public sector, credit to private sector and other account.
OUTPUT denoted real industrial output As already represented, Vietnam’s industrial output is used as proxy for GDP, due to data limited.
Broad money stock Customer price index
IFS-IMF CREDIT Domestic credit to economy
Vietnam GSO REFIN Refinancing rate
REFIN symbolized refinancing rate That is the rate charged by the State Bank of
Vietnam on its lending to facilities to all credit institution (IMF world and country noted, 2009).
Lfi symbolized lending rate This index is calculated by average rates at the end of period on short-term working capital loans for four large state-owned commercial
• banks (IMF world and country noted, 2009).
Excepting for output that is extracted from Vietnam General Statistic Office, these variables are taken from the International Monetary Fund’s (IMF) InternationalFinancial Statistic (IFS).
STEPS OF ESTIMATION
Stock and Watson (2001) stated that due to the complicated dynamics in the VAR, below statistics are more informative than estimated VAR regression coefficients or R' statistics.
Stationary and unit-root test According to Gujarati (2003), stationary time series are
Testing for stationarity in time series data is crucial because non-stationary series can lead to misleading results in regression analysis, often referred to as "spurious" relationships Therefore, it is essential to ensure that all variables are stationary before applying a Vector Autoregression (VAR) model.
Several formal statistical tests address the unit-root problem, with the Augmented Dickey-Fuller (ADF) and Phillips-Perron (PP) tests being the most favored These tests incorporate additional lagged terms of the dependent variable to effectively eliminate autocorrelation.
The Granger causality test is a crucial step in the regression analysis of VAR models, widely used in economic policy evaluation This test serves as an effective method for assessing the significance of coefficients, allowing for accurate predictions of variable Xi based on its historical values.
Y, variable rather than not using such past value, or causality represents the ability of one variable to predict another variable.
Impulse response analysis and variance decomposition are essential tools in econometrics Impulse responses illustrate how current and future values of a variable react to a one-unit increase in the current value of a VAR error, while keeping other errors constant This analysis includes ± 1 standard error bands, providing an approximate 66 percent confidence interval for each impulse response Additionally, the forecast error decomposition tool reveals the percentage of variance in the forecasting error of a variable attributable to specific shocks over a defined horizon (Stock and Watson 2001).
FINDING AND DISCUSSION
DESCRIPTIVE STATISTIC
This part reports the descriptive statistic of all variables of original data, also changed It summarizes the mean, median, max, min, standard deviation and count of each variable.
Table 4.1: Description statistic of variables
Mean Median Maximum Minimum Std Dev Obs.
The analysis of data from the IMF-IFS and GSO reveals significant volatility in the Consumer Price Index (CPI), credit, M2, and output, as indicated by their high standard deviations and the considerable range between maximum and minimum values (see Table 4.1) Consequently, the estimation results derived from the original values may lack reliability To address this issue, transforming these variables into logarithmic form is recommended.
• 34 multiplying by 100, or estimating those variables in percentage changes otherwise makes the standard deviation of them drop significant.
The original data presented in Figures la and b of the appendix reveals a significant trend in domestic credit supply and quasi-money, both of which have experienced sharp increases, particularly after 2007 In contrast, incremental output has shown minimal variation As discussed in Chapter 2, the substantial rise in credit can be attributed to large capital inflows and the emergence of real estate price bubbles.
UNIT ROOT TESTS
Asteriou and Hall (2007) emphasize that macroeconomic variables often exhibit trends The results from both the Augmented Dickey-Fuller (ADF) and Phillips-Perron (PP) tests indicate that all examined variables are non-stationary, as shown in Tables 4.2 and 4.3.
Table 4.2: Augment Dickey-Fuller test
Source Calculated from IMF-IFS and GSO data
The analysis reveals that while the changed data are stationary, the CL CPI variable does not meet the criteria for stationarity according to the ADF test; however, it does satisfy the conditions of the PP test Consequently, these data can be utilized to uncover the key answers for the thesis.
Exogenous I-statistic value Data in Level
Source Calculated from IMF-IFS and GSO data Concern to the optimal lag problem for VAR model, different criteria are used to determine.
Table 4.4: Optimal lap-Classical market
Lag LogL LR FPE AIC SC HQ
Source Self calculation by using Eviev²s
Table 4.5: Optimal lap-Augmented market
Lag LogL LR FPE AIC SC HQ
5 -698.5861 40.21531 35079391 33.38061* 40.29522 36.03963 indicates lag order selected by the criterion
LR: sequential modified LR test statistic (each test at 5% level)
HQ: Hannan-Quinn information criterion
Table 4.4 and 4.5 illustrate that several statistical methods can determine the optimal lag length for our model, with the Akaike Information Criterion (AIC) and Schwarz Criterion (SC) being the most significant To minimize the information criteria, the optimal number of lags is identified as five for both markets based on the minimum AIC Therefore, I have chosen to apply five lags in the VAR model for both cases.
VAR REGRESSION STATISTICS FOR CLASSICAL AND AUGMENTED MARKET
Table 4.6 presents the regression statistics for the VAR model in a classical market context, showcasing p-values derived from the VAR Granger Causality test with five lags The null hypothesis indicates that the independent variable does not cause the dependent variable.
Lagged values of most variables significantly predict output at a 5 percent level, with the exception of the lending rate, which is significant at a 10 percent level While the lending rate does not predict money-quasi, it is useful for forecasting the consumer price index, output, and refinancing rate at the 10 percent level Furthermore, the refinancing rate provides limited information for predicting other macro variables at the 10 percent significance level, apart from output Notably, money supply does not Granger cause the lending rate.
From the late 1980s to 2000, Vietnam maintained a positive real interest rate as a strategy for controlling inflation (Dung, 2010) During this period, there were instances where deposit rates exceeded lending rates, such as in March 1989 when the spread between industry loans and three-month household deposits was minus 1.5 percent (IBP USA, 2005) In August 2000, the State Bank of Vietnam (SBV) transitioned from a ceiling interest rate mechanism to a base interest rate mechanism, allowing for more flexibility in lending rates (IBP USA, 2005) However, lending rates in Vietnam have only recently begun to liberalize, which means they do not accurately reflect the demand and supply dynamics of the money market (Hung and Pfau, 2008) Additionally, in a credit-less market, no independent variable in the classical market serves as a Granger cause for money supply, indicating a lack of strong correlation between lending rates and money supply, suggesting that the classical market may be overlooking critical factors.
Table 4.6: VAR Regression Statistic- Classical market
Classical credit VAR Granger- CausalityTest Market
Source Calculated from IMF-IFS and GSO data
Table 4.7: VAR Regression Statistic- Augmented market Augmented VAR Granger- CausalityTest
Independent CL_CPI CL_CREDIT CL_LR CL_M2 CL_OUTPUT CL_REFIN vars
, Source Calculated from IMF-IFS and G5'O data
Note: The reported are p-value
The augmented credit market reveals that lagged values of credit are highly significant in predicting money supply, with a p-value of zero However, credit does not Granger cause output or price levels, indicated by p-values of 0.67 and 0.19, respectively This suggests that the State Bank of Vietnam primarily utilizes credit to inject liquidity into the money market Price levels serve as a useful predictor of money supply at the 5 percent significance level While the lending rate does not significantly predict output, it shows a weaker Granger causation with money policy shocks or credit at a p-value of 0.1 Nevertheless, this improvement highlights the important role of credit in the market Additionally, price levels and refinancing rates together Granger cause output, and output along with lending rates can predict credit at a 10 percent significance level, whereas M2 does not effectively forecast credit or output.
Regression statistics reveal key insights into monetary transmission and lending channels The VAR results indicate that traditional models may misrepresent these dynamics, while an augmented model that includes credit significantly enhances the forecasting of money supply Additionally, the lending rate's influence appears diminished in models excluding credit, but its importance increases when credit is considered Furthermore, price level and lending rate emerge as the second and third most valuable predictors of money supply, highlighting their relevance beyond credit factors.
4.4 IMPULSE RESPONES AND VARIANCE DECOMPOSITIONS
This article examines the impact of monetary policy shocks and credit variables on Vietnam's macroeconomy, focusing on changes in the money supply, specifically M2 By analyzing regression estimates, we aim to understand how these shocks influence economic dynamics in the country.
Figure 4.1: The impulse response functions for classical market
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Recent calculations based on IMF-IFS and GSO data indicate that output adjusts with a lag of one quarter, displaying greater fluctuations compared to M2 The findings suggest that output is relatively sensitive to monetary shocks, although the response is not perfectly proportional This sensitivity persists for a duration of two quarters.
The growth has recovered since the fourth quarter, with output remaining 1.32 percent below pre-shock levels Lending rates respond positively to monetary shocks after one quarter, peaking at 2.2 percent in the sixth quarter, but subsequently decline over the next three quarters while M2 maintains a tight policy The price level reacts slowly to M2 shocks, with noticeable changes occurring after the fifth quarter Additionally, the refinancing rate also responds to monetary shocks after one quarter, reaching a peak of 3.8 percent.
The money supply tends to respond positively to decreases in lending rates after a quarter, although this effect is short-lived Typically, contractionary monetary policy leads to higher lending rates, which restrains investment and subsequently decreases aggregate demand and output However, this relationship does not always hold true, as historical data has shown an abnormal correlation between money supply (M2) and lending rates For instance, while M2 continued to grow, lending rates remained constrained at 14.4 percent in 1998, illustrating this inconsistency.
From Q3 2002 to Q3 2008, a recurring phenomenon linked to bad credit in real estate and financial investments was observed (Dung, 2010) Lending rate shocks began impacting output in the second quarter, but these effects were short-lived, lasting only one quarter In contrast, output shocks prompted a significant reaction in money supply, which was evident after just one quarter.
These reactions are consistent with the regression statistic; output is highly sensitive to monetary shock; the impact of lending rate shock on money supply is somewhat weak.
’Response of all variables represent the cumulative percentage change following the shock
Figure 4.2: The impulse response functions for augmented market
Source Calculatedfrom IMF-IFS and GSO data
In the augmented market, credit shocks initially lead to a 4.9% expansion, but this is short-lived, with a dramatic decline to -1.39% by the second quarter The tightening of credit persists for twelve quarters, significantly impacting output, which drops sharply from 1.1% to -1.9% by the fourth quarter following the shock Although output begins to recover and fluctuates within a narrow range towards the end of the year, M2 reacts immediately and sharply, plummeting from 3% to 0.5% within just one quarter, with this decline also lasting for twelve quarters.
Lending rate is slow reactions to credit shocks, because of specific characteristic of Vietnam’s credit market as mentioned above.
In response to money shocks, credit exhibits a minimal yet persistent reaction when M2 shifts from easing to tightening during the initial two quarters Output begins to respond to M2 shocks in the second quarter, reaching a low of 0.7 percent by the fourth quarter Both refinancing rates take two quarters to react to the tightening of monetary policy, while the price level shows a relatively slow response, taking five quarters to adjust.
Credit responses to lending rate shocks are slow, as indicated in the second row and third column After four quarters, credit shows a delayed reaction, decreasing immediately in response to rising lending rates Additionally, output takes one quarter to react to these shocks and experiences continuous fluctuations over the following eight quarters.
In summary, credit shocks significantly impact monetary policy, leading to reduced output and prolonged effects on lending rates Additionally, monetary policy shocks result in decreased output, higher refinancing rates, and a slight reduction in price levels.
In analyzing the variance decomposition of M2 across two markets, significant differences emerge, as shown in Table 4.8 In the classical market, M2 accounts for over 50% of the variance in its error, while this is not the case in the augmented market This trend persists across various horizons, gradually diminishing with longer timeframes Notably, at the 13-quarter horizon, credit shocks contribute 21.5% to the forecast error variance of M2, compared to just 15.7% from M2 itself In the first quarter, credit shocks dominate, accounting for over 50% of the error in predicting money-quasi, while price level shocks also enhance M2 forecasting in the credit market Additionally, refinancing rate shocks contribute 20% after nine quarters in the augmented market, a stark contrast to their minimal impact in the classical model Although lending rate shocks show some improvement in the augmented market, their influence remains relatively weak compared to other factors.
- output response is modestly smaller in the market with credit (8.4 percent compare to
POLICY IMPLICATION
The study highlights significant implications for policymakers regarding the credit channel and the monetary transmission mechanism The findings demonstrate the crucial role that the credit channel plays in the transmission of monetary policy.
, Vietnam; hence; in order to regulate the economy development through reasonable monetary policy at each period, some recommendations are given below:
The credit channel is vital in the monetary transmission mechanism in Vietnam, necessitating careful control of the credit sector during the implementation of new monetary policies Changes in government policy, whether shifting from loose to tight monetary policy or the reverse, have a direct and significant impact on this channel The State Bank of Vietnam (SBV) plays a crucial role in regulating credit flow within the economy through various instruments As the central bank overseeing commercial banks, the SBV must provide sound recommendations and practical policies to the government To enhance the effectiveness of these tasks, it is essential to grant the SBV greater autonomy in decision-making.
Monetary policy tightening has an immediate and significant impact on credit supply, leading to a notable decline in output, particularly after a short lag This effect occurs through two main channels: the bank lending channel and the balance sheet channel, both of which ultimately result in reduced output The primary issue stems from a lack of credit availability for manufacturing enterprises To address this, it is crucial to implement support programs for these businesses, which can help stabilize economic growth without adversely affecting the production sector, especially in an agriculture-driven economy like Vietnam Although the Vietnamese government has introduced various subsidized programs for this sector in recent years, there are still significant shortcomings in their implementation Therefore, it is essential for the government to enhance oversight and ensure the effectiveness of these policies.
The relationship between lending channels and monetary policy in Vietnam often deviates from theoretical expectations due to various factors, including the underdevelopment of the country's financial market Despite having some autonomy in credit operations and interest negotiations, commercial banks remain reliant on the State Bank of Vietnam's guidance for lending decisions Therefore, it is crucial to explore alternative solutions for lending rates, advocating for a gradual marketization of the lending mechanism.
Variance decomposition indicates that credit and price levels significantly influence the dynamics of money-quasi, particularly in the short run Specifically, credit growth and inflation are critical factors affecting the errors associated with money-quasi Therefore, it is essential to manage credit growth carefully, focusing on financing development projects rather than speculative operations to mitigate the risks of bubbles and bad debts.
Monetary policy must be applied with caution and flexibility to improve the effectiveness of money stock management To fulfill this responsibility, the State Bank of Vietnam (SBV) should closely monitor and anticipate shifts in both domestic and global financial markets to implement timely and appropriate policies.
Understanding the significance of the credit channel in the monetary transmission mechanism is crucial for mitigating negative impacts from newly implemented policies Successful implementation of these measures can lead to positive outcomes.
• significant improvement the health of Vietnam’s financial market.
LIMITATION AND FURTHER STUDIES
Although, this study has answered all the key questions about the role of credit in monetary transmission mechanism in Vietnam case, it also contains some limitations.
Vietnam faces significant limitations in data availability, restricting the study's ability to analyze longer time periods Since Vietnam's GDP data has only been available since 2000, the research utilizes industrial output value as a proxy for GDP Additionally, following Lown and Morgan's methodology, the study employs domestic credit value as a standard variable to represent the net percentage tightening.
VAR models serve as essential tools for understanding the role of credit in monetary transmission They have significantly enhanced the macro econometricians' toolkit by providing effective methods for data analysis and generating reliable multivariable benchmark forecasts (Stock and Watson, 2001).
This study utilized impulse response and variance decomposition of the VAR model to analyze the impact of credit and monetary transmission using quarterly data from Q1 1996 to Q3 2010 Future research could enhance this analysis by employing monthly data over an extended period to better understand the correlation and interactions between these variables Additionally, incorporating alternative models, such as the vector error correction (VECM) model, would help determine the robustness of these findings in the context of Vietnam.
Besides that, the study could add several variables such as Federal Funds rate, exchange rate to exploit how the changes of estimated result with joined new variables.
’ 6 The number of banks tightening less the number easing, divided by the number reporting (Lown and Morgan,
The credit plays important role in monetary transmission Hence, potential study may expand by consider the determinants of domestic credit in Vietnam case.
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