## _wp13155 - References

## Source details

**Canonical URL:** [_wp13155 - References](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2013/_wp13155.pdf)

## Other formats

- [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2013/_wp13155.pdf.md)
- [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2013/_wp13155.pdf.json)

---

### I. Introduction: context and objectives
- Vietnam transitioned from a centrally-planned to a ‘socialist oriented market economy’ since the doi moi reforms in 1986.
- Real GDP growth:
  - averaged 9 percent per year in the early-to-mid 1990s.
  - reached 8.5 percent in 2007.
  - slowed to 5.0 percent in 2012.
- Inflation developments (2011–2012):
  - CPI inflation fell from 18.1 percent at end-2011 to 6.8 percent at end-2012.
  - Core inflation fell from 14.3 percent to 9.6 percent over the same period.
- Observed problem: Vietnam experienced higher and more volatile inflation compared to most emerging Asian economies since mid-2007.
- Criticisms of monetary policy in Vietnam:
  - lack of transparency and predictability.
  - pursuit of multiple—and at times conflicting—objectives: promoting economic growth, fighting inflation, stabilizing the exchange rate, and preserving financial system stability.
  - prevalent use of caps on interest rates and controls on credit.
- Empirical focus: assess monetary policy transmission and its role in inflation; answer:
  - (i) what are the key drivers of inflation in Vietnam, and what role does monetary policy play?
  - (ii) why has inflation in Vietnam been persistently higher than in most other emerging market economies in the region?

### II. Inflation developments: historical episodes and drivers
- 1980s–1990s stabilization:
  - hyperinflation in late 1980s/early 1990s; inflation fell from >300 percent in 1986-88 to below 20 percent in 1992 and close to 10 percent in 1995.
- Late 1990s–early 2000s:
  - two years of mild deflation in 2000 and 2001; headline and core inflation low in 2002–2003.
- 2004–mid-2008 upswing:
  - inflation rose sharply with growth, international commodity price increases, excess demand; headline inflation peaked at almost 25 percent in 2008Q3.
- 2008–2009 decline and rebound:
  - headline inflation fell to 2.4 percent by 2009Q3.
  - end-2009 pickup following fiscal stimulus (~5 percent of GDP in 2009) and monetary easing:
    - base (prime) rate cut by a total of 700 basis points between October 2008 and February 2009 and kept at 7 percent until November 2009.
    - liquidity injections via open market operations and lower reserve requirement ratio on VND deposits.
- 2010–2012 dynamics:
  - monetary policy tightened early 2010 then loosened mid-year; headline inflation rose to 20.2 percent in 2010Q3 (document notes this peak).
- 2011–2012:
  - headline inflation declined more-or-less steadily to reach a low of 6.3 percent in 2012Q3 following policy package ‘Resolution 11’ announced end-February 2011; core inflation followed similar but more gradual pattern.

### III. Monetary policy framework and transmission issues
- Four de facto policy objectives:
  - promoting economic growth.
  - fighting inflation.
  - stabilizing the exchange rate.
  - preserving financial system stability.
- Instruments and constraints:
  - caps on interest rates.
  - controls on credit allocation and growth.
  - open market operations and reserve requirement ratio adjustments.
- Identified weaknesses:
  - lack of transparency and predictability.
  - multiple/conflicting objectives hindering transmission.
- Research gap: prior empirical work on Vietnam’s transmission mechanism limited and at times conflicting in results.

### IV. Model structure, data and econometric approach
- CPI inflation decomposition and reduced-form:
  - Δp_t = θ Δp_t^T + (1- θ) Δp_t^NT  (0 < θ < 1)
  - Tradables: Δp_t^T = λ Δε_t + μ Δp_t^W
  - Non-tradables: Δp_t^NT = α EC_{t-1} + η Δε_t  (EC = excess money)
  - Reduced-form: Δp_t = κ1 Δε_t + κ2 Δp_t^W + κ3 EC_{t-1}
  - Expanded empirical specification (percentage changes year-on-year, except interest rate):
    - Δp_t = κ1 Δε_t + κ2 Δp_t^W + κ3 ΔM_t + κ4 ΔY_t + κ5 Δr_t + ξ_t
    - M = money supply; r = nominal interest rate (refinancing rate); Y = real output (GDP)
- Data and estimation:
  - Variables as year-on-year percentage changes, except end-of-period nominal refinancing interest rate.
  - ADF unit root tests: null rejected for all variables except growth in credit to the economy (borderline/ambiguous).
  - OLS for 2000Q1–2012Q2; structural breaks at 2004Q1 and 2007Q4 (Quandt-Andrews).
  - VAR for 2004Q1–2012Q2:
    - Endogenous: CPI inflation, GDP growth, credit growth, % change in NEER, nominal interest rate.
    - Exogenous: % change in import price deflator and structural break dummies (2007Q4).
    - Lag length: one (Schwarz Information Criterion).
    - Stability: all roots inside unit circle.
    - Cholesky ordering: nominal interest rate; real GDP growth; growth of total credit; % change in NEER; headline inflation.
    - Elasticities computed from cumulative impulse responses.

### V. Key empirical findings and elasticities
- Main drivers:
  - Short-run: movements in the nominal effective exchange rate (NEER) are key drivers of inflation.
  - Medium-term (two- to ten-quarter horizon): GDP growth and growth in credit to the economy are principal factors.
  - Interest rate shocks: significant only in first two quarters and counter-intuitively positive for inflation (price puzzle).
- VAR impulse-response elasticities of headline inflation to shocks (quarters 1–16, selected series from Table 2):
  - Credit growth: 0.11, 0.19, 0.26, 0.33, 0.41, 0.51, 0.62, 0.77, 0.97, 1.26, 1.62, 1.84, 1.59, 1.11, 0.78, 0.60
  - Interest rate: 0.30, 0.34, 0.26, 0.08, -0.18, -0.51, -0.87, -1.22, -1.52, -1.72, -1.77, -1.68, -1.48, -1.22, -0.98, -0.78
  - NEER: -0.14, -0.16, -0.19, -0.22, -0.25, -0.26, -0.27, -0.26, -0.24, -0.21, -0.19, -0.16, -0.14, -0.13, -0.13, -0.14
  - GDP growth: -0.66, -0.02, 0.70, 1.51, 2.38, 3.27, 4.14, 4.88, 5.35, 5.43, 5.07, 4.38, 3.58, 2.86, 2.36, 2.09
- Responses to a one standard deviation interest rate shock (accumulated elasticities, quarters 1–16, Table 3):
  - Headline inflation: 0.30, 0.34, 0.26, 0.08, -0.18, -0.51, -0.87, -1.22, -1.52, -1.72, -1.77, -1.68, -1.48, -1.22, -0.98, -0.78
  - GDP growth: -0.12, -0.15, -0.18, -0.20, -0.21, -0.22, -0.21, -0.19, -0.17, -0.14, -0.11, -0.09, -0.07, -0.07, -0.08, -0.10
  - Credit growth: -0.48, -1.18, -1.98, -2.82, -3.65, -4.40, -5.01, -5.42, -5.57, -5.42, -5.00, -4.42, -3.81, -3.30, -2.98, -2.85
  - NEER: -0.60, -0.57, -0.51, -0.46, -0.44, -0.47, -0.55, -0.67, -0.82, -0.98, -1.12, -1.21, -1.23, -1.19, -1.12, -1.02
- Summary interpretation:
  - Credit growth exerts a significant positive impact on inflation over 2–10 quarters.
  - Positive real GDP shocks generate inflationary pressures after 4 quarters, lasting about 5 subsequent quarters.
  - Raising the nominal interest rate reduces GDP and credit growth over the medium term; initial positive inflation response (price puzzle) may reflect persistent expected inflation and a passive central bank.

### VI. Cross-country panel evidence: why Vietnam’s inflation was relatively high
- Sample and method:
  - Quarterly data 2004Q1–2012Q2 for China, India, Sri Lanka, Thailand, Philippines, Malaysia, Indonesia, and Vietnam.
  - Country-specific GMM-IV with lagged dependent variable and exogenous import price deflator; structural break dummies included.
- Panel findings:
  - For the full sample, past inflation and contemporaneous import price movements are important determinants.
  - Lagged GDP growth, lagged M2 growth, lagged NEER movements, and lagged nominal interest rates generally play no role across the sample.
- Vietnam-specific outcomes:
  - Higher inflation persistence: one percentage point of past inflation is associated with an inflation increase of about 0.87 in the current period—0.51 percentage points higher than the sample average.
  - Lagged GDP growth and lagged NEER movements had an important impact on headline inflation in Vietnam over 2004Q1–2012Q2, unlike in other countries.
  - Neither lagged nominal interest rate nor lagged M2 growth had a significant impact on inflation for Vietnam or the other sample countries in this period.

### VII. Policy implications and recommendations
- Short-term priority:
  - Monitor and manage nominal effective exchange rate movements as the main short-run driver of inflation.
- Medium-term priority:
  - Contain credit growth and manage demand-side pressures, since credit growth and GDP growth drive inflation over 2–10 quarters.
- Monetary policy transmission and credibility:
  - Raising the nominal interest (refinancing) rate reduces GDP growth and credit growth over the short- to medium-term and can be disinflationary over time despite a short-run “price puzzle”.
  - Persistent inflation and high inertia in Vietnam imply the need for credible, forward-looking monetary policy and measures to anchor inflation expectations.
- External price monitoring:
  - Continue tracking import price deflator, oil and rice prices given their significant contemporaneous impact on domestic inflation.
- Specific policy recommendations:
  - Give the State Bank and Vietnam a clear mandate and greater autonomy to pursue price stability as the primary policy objective (Law on the State Bank of Vietnam, June 2010, did not give such a clear mandate; Paragraph 1 of Article 4 cited in the source text).
  - Fade away administrative controls on interest rates and on credit allocation and growth; allow interest rates to be more market-determined over time.
  - Establish an interest rate corridor incorporating both a lending rate and a deposit rate; the corridor introduced in May 2008 did not create a true corridor for the interbank interest rate since both were effectively lending rates.
    - Note in the source: Mohanty and Turner (2008) find that introducing a corridor for the daily interbank rate in India in 2004 improved control over market interest rates.

### VIII. Data and estimation notes
- Dependent variable: CPI inflation.
- Estimation methods: Fixed effects feasible GLS with robust standard errors; regressions estimated using GMM-IV.
- Sample period for comparative analysis: 2004Q1–2012Q2.
- Countries included in comparative analysis: Indonesia, Philippines, China, Sri Lanka, Thailand, Malaysia, India, and Vietnam.

*Source — IMF staff calculations and analysis in the provided content.*

### References .............................................................................................................

### _wp13155 - References

### I. Introduction: context and objectives
- Vietnam transitioned from a centrally-planned to a ‘socialist oriented market economy’ since the doi moi reforms in 1986.
- Real GDP growth:
  - averaged 9 percent per year in the early-to-mid 1990s.
  - reached 8.5 percent in 2007.
  - slowed to 5.0 percent in 2012.
- Inflation developments noted for 2011–2012:
  - CPI inflation fell from 18.1 percent at end-2011 to 6.8 percent at end-2012.
  - Core inflation fell from 14.3 percent to 9.6 percent over the same period.
- Observed problem: Vietnam experienced higher and more volatile inflation compared to most emerging Asian economies since mid-2007.
- Criticisms of monetary policy in Vietnam:
  - lack of transparency and predictability.
  - pursuit of multiple—and at times conflicting—objectives: promoting economic growth, fighting inflation, stabilizing the exchange rate, and preserving financial system stability.
  - prevalent use of caps on interest rates and controls on credit.
- Paper’s empirical focus:
  - assess how the monetary policy transmission mechanism operates and affects inflation.
  - answer two key questions:
    - (i) what are the key drivers of inflation in Vietnam, and what role does monetary policy play?
    - (ii) why has inflation in Vietnam been persistently higher than in most other emerging market economies in the region?

### II. Inflation developments: historical episodes and drivers
- 1980s–1990s stabilization:
  - Vietnam experienced hyperinflation in the second half of the 1980s and early 1990s.
  - Tight monetary and fiscal policy brought inflation down from annual rates exceeding 300 percent in 1986-88 to below 20 percent in 1992 and to close to 10 percent in 1995.
- Late 1990s–early 2000s:
  - Two years of mild deflation in 2000 and 2001 due to excess capacity and depressed commodity prices.
  - Headline and core inflation remained low in 2002 and 2003.
- 2004–mid-2008 upswing:
  - Inflation rose sharply as growth picked up, reflecting international commodity price increases and growing excess demand.
  - Contributing factors included heavy investment by state-owned enterprises and a surge in foreign direct investment ahead of WTO accession.
  - Headline inflation peaked at almost 25 percent in the third quarter of 2008.
- 2008–2009 decline and rebound:
  - Headline inflation fell to 2.4 percent by the third quarter of 2009 due to weakening domestic demand and lower food and energy prices.
  - End-2009 pickup reflected the impact of a fiscal stimulus and monetary easing:
    - fiscal stimulus around 5 percent of GDP in 2009.
    - base (prime) rate cut by a total of 700 basis points between October 2008 and February 2009 and kept at 7 percent until November 2009.
    - liquidity injected via open market operations and a much lower reserve requirement ratio on Vietnamese dong deposits.
- 2010 policy reversal and 2010–2012 inflation dynamics:
  - The State Bank of Vietnam initially tightened monetary policy in 2010 to control inflation, then loosened again mid-year, contributing to headline inflation rising more-or-less steadily to reach 20.2 percent in the third quarter of 2010 (text cuts off but records the 20.2 percent peak).

### III. Monetary policy framework and transmission issues
- Four key policy objectives in practice:
  - promoting economic growth.
  - fighting inflation.
  - stabilizing the exchange rate.
  - preserving the stability of the financial system.
- Policy instruments and constraints:
  - caps on interest rates.
  - controls on credit.
  - use of open market operations and adjustments to reserve requirement ratios.
- Identified weaknesses:
  - lack of transparency and predictability undermines policy effectiveness.
  - multiple and sometimes conflicting objectives complicate the transmission of monetary policy.
- Research gap:
  - empirical work on the monetary policy transmission mechanism in Vietnam has been relatively limited and has sometimes produced conflicting results and policy conclusions.

### IV. Empirical and analytical structure of the paper (as described)
- Section organization:
  - Section II: overview of inflation developments in Vietnam post-doi moi.
  - Section III: brief review of existing empirical literature on inflation in Vietnam.
  - Section IV: presentation of a very simple theoretical model of inflation.
  - Section V: presentation and discussion of empirical results from econometric analysis.
  - Final section: conclusions and policy implications.
- Empirical analysis goals:
  - identify key drivers of inflation and quantify the role of monetary policy.
  - explain why Vietnam’s inflation has been persistently higher than in most other emerging market economies in the region.

### V. Tables, figures, and appendixes listed in the content unit
- Tables (titles only, as listed):
  - 1. Unit Root Tests
  - 2. Elasticities of Headline Inflation to Shocks in Endogenous Variables
  - 3. Endogenous Variable Response Elasticities to Shocks in Nominal Interest Rate
  - 4. Sources of Inflation in Vietnam and Selected Asian Countries 1/
- Figures (titles only, as listed):
  - 1. Emerging Asia: Headline Inflation, 2000-2012
  - 2. Vietnam: CPI Inflation, 1999-2012
  - 3. Vietnam: CPI Inflation, the Nominal Interest Rate, and Growth in Credit to the Economy
  - 4. Impulse Response of Inflation from VAR Estimation
  - 5. Accumulated Response to One Standard Deviation Interest Rate Shock
  - 6. Persistence of a One-Time Increase in Inflation
- Appendixes:
  - Data Appendix (listed)

*Document: _wp13155 - References*

### 2011. Headline inflation then declined more-or-less steadily to reach a low of 6.3 percent in

### _wp13155 - 2011. Headline inflation then declined more-or-less steadily to reach a low of 6.3 percent in

### Inflation dynamics (1999–2012)
- Headline inflation declined more-or-less steadily to reach a low of 6.3 percent in 2012Q3, reflecting to a large extent the impact of a package of monetary and fiscal policy tightening measures announced by the government at end-February 2011 and known as ‘Resolution 11’. More recently headline inflation has shown signs of picking up again.
- Core inflation followed a similar pattern to headline inflation, but both the rises and declines in inflation have been more gradual.

### Literature review: empirical findings on inflation drivers in Vietnam
- Monetary aggregates
  - IMF (2003): broad money growth explains only 10 percent of the variation in core inflation over 1995–2003; role of monetary aggregates on consumer price inflation is neither robust nor very significant.
  - IMF (2006): growth of M2 significantly affected inflation dynamics with a twelve month lag over 2001–2006.
  - Hung and Pfau (2008): M2 Granger-caused real output growth but not inflation over 1996–2005.
  - Minh (2009) and Nguyen and Nguyen (2010): growth of M2 has a modest and significant positive impact on CPI inflation after a delay of five months or longer.
  - Camen (2006): M2 explains less than 5 percent of forecast variance of CPI inflation; growth of total credit explains around 25 percent after 24 months (1996–2005).
- Interest rate
  - Most studies find no significant impact of the interest rate on inflation.
  - Hung and Pfau (2008): real lending interest rate had no statistically significant effect on output or CPI inflation (1996–2005).
  - Nguyen and Nguyen (2010): effect of a change in interest rate is almost immediate but very weak and soon becomes insignificant.
  - Camen (2006): lending rate explains less than 5 percent of forecast variance of CPI inflation (1997–2005).
- Exchange rate pass-through
  - IMF (2003): nominal effective exchange rate movements explain 10 percent of variation in core inflation (1995–2003), pass-through coefficient 0.25 in the first year.
  - IMF (2006): pass-through coefficient 0.03 in the first year for headline CPI (2001–2006).
  - Camen (2006): nominal effective exchange rate explains 19 percent of forecast variance of CPI inflation after twelve months.
  - Minh (2009): pass-through coefficient 0.08 in first year; impact dies away after 15 months (2001M1–2007M2).
  - Nguyen and Nguyen (2010): find a larger and more significant role of exchange rate devaluation in increasing inflationary pressures (includes 2008–2010 period).
- World commodity prices
  - Camen (2006): petrol movements explain 21 percent and rice 11 percent of forecast variance of CPI inflation after twelve months.
  - Minh (2009): oil prices have a significant impact on consumer price inflation.
  - Nguyen, Cavoli and Wilson (2012): money supply, oil prices, and rice prices present the strongest influences on CPI inflation in Vietnam.

### Model structure used in this paper
- CPI inflation decomposition
  - Δp_t = θ Δp_t^T + (1- θ) Δp_t^NT  (0 < θ < 1)
  - Tradables: Δp_t^T = λ Δε_t + μ Δp_t^W
  - Non-tradables: Δp_t^NT = α EC_{t-1} + η Δε_t  (EC = excess money)
- Reduced-form inflation equation
  - Δp_t = κ1 Δε_t + κ2 Δp_t^W + κ3 EC_{t-1}
- Expanded empirical specification (percentage changes year-on-year, except interest rate)
  - Δp_t = κ1 Δε_t + κ2 Δp_t^W + κ3 ΔM_t + κ4 ΔY_t + κ5 Δr_t + ξ_t
  - M = money supply; r = nominal interest rate (refinancing rate); Y = real output (GDP)

### Data and econometric approach
- Variables measured as year-on-year percentage changes, except end-of-period nominal refinancing interest rate.
- Augmented Dickey-Fuller (ADF) unit root tests: null of unit root rejected for all variables except growth in credit to the economy (borderline/ambiguous).
- OLS initially for 2000Q1–2012Q2; Quandt-Andrews tests indicate structural breaks in 2004Q1 and 2007Q4 (linked to price liberalization and WTO accession effects).
- VAR approach for 2004Q1–2012Q2:
  - Endogenous variables: CPI inflation, GDP growth, credit growth, percentage change in nominal effective exchange rate, nominal interest rate.
  - Exogenous: percentage change in import price deflator and structural break dummies (2007Q4).
  - Lag length: one (Schwarz Information Criterion).
  - Stability: all roots inside unit circle.
  - Cholesky ordering: nominal interest rate; real GDP growth; growth of total credit; percentage change in NEER; headline inflation.
  - Elasticities computed from cumulative impulse responses.

### Key empirical findings and elasticities
- Main drivers
  - Short-run: movements in the nominal effective exchange rate are the key drivers of inflation.
  - Medium-term (two- to ten-quarter horizon): GDP growth and growth in credit to the economy are principal factors driving inflation.
  - Interest rate shocks: significant only in first two quarters and counter-intuitively positive for inflation (price puzzle).
- VAR impulse-response elasticities of headline inflation to shocks (selected values from Table 2)
  - Credit growth (quarters 1–16): 0.11, 0.19, 0.26, 0.33, 0.41, 0.51, 0.62, 0.77, 0.97, 1.26, 1.62, 1.84, 1.59, 1.11, 0.78, 0.60
  - Interest rate (quarters 1–16): 0.30, 0.34, 0.26, 0.08, -0.18, -0.51, -0.87, -1.22, -1.52, -1.72, -1.77, -1.68, -1.48, -1.22, -0.98, -0.78
  - NEER (quarters 1–16): -0.14, -0.16, -0.19, -0.22, -0.25, -0.26, -0.27, -0.26, -0.24, -0.21, -0.19, -0.16, -0.14, -0.13, -0.13, -0.14
  - GDP growth (quarters 1–16): -0.66, -0.02, 0.70, 1.51, 2.38, 3.27, 4.14, 4.88, 5.35, 5.43, 5.07, 4.38, 3.58, 2.86, 2.36, 2.09
- Responses to a one standard deviation interest rate shock (accumulated elasticities from Table 3, quarters 1–16)
  - Headline inflation: 0.30, 0.34, 0.26, 0.08, -0.18, -0.51, -0.87, -1.22, -1.52, -1.72, -1.77, -1.68, -1.48, -1.22, -0.98, -0.78
  - GDP growth: -0.12, -0.15, -0.18, -0.20, -0.21, -0.22, -0.21, -0.19, -0.17, -0.14, -0.11, -0.09, -0.07, -0.07, -0.08, -0.10
  - Credit growth: -0.48, -1.18, -1.98, -2.82, -3.65, -4.40, -5.01, -5.42, -5.57, -5.42, -5.00, -4.42, -3.81, -3.30, -2.98, -2.85
  - NEER: -0.60, -0.57, -0.51, -0.46, -0.44, -0.47, -0.55, -0.67, -0.82, -0.98, -1.12, -1.21, -1.23, -1.19, -1.12, -1.02
- Summary interpretation
  - Credit growth has a significant positive impact on inflation over a medium-term horizon of 2–10 quarters.
  - Positive shocks to real GDP growth tend to generate inflationary pressures after 4 quarters, lasting for subsequent 5 quarters.
  - Interest rate shocks significantly reduce GDP growth (five-quarter horizon) and credit growth (eight-quarter horizon).
  - The ‘price puzzle’ (short-run positive inflation response to interest rate shock) may reflect high persistence of expected inflation and a passive central bank response.

### Cross-country panel evidence: why Vietnam’s inflation was relatively high
- Sample: quarterly data 2004Q1–2012Q2 for China, India, Sri Lanka, Thailand, Philippines, Malaysia, Indonesia, and Vietnam.
- Estimation: country-specific GMM-IV with lagged dependent variable and exogenous import price deflator. Structural break dummies included (2007Q4 or 2008Q3; Indonesia 2005Q4 single shock).
- Panel results (summary)
  - For the full sample, past inflation and contemporaneous import price movements are important determinants of inflation.
  - Lagged GDP growth, lagged M2 growth, lagged NEER movements, and lagged nominal interest rates generally play no role in explaining inflation across the sample over the estimation period.
- Vietnam-specific results
  - Vietnam exhibits much higher inflation persistence: one percentage point of past inflation is associated with an inflation increase of about 0.87 in the current period—0.51 percentage points higher than the sample average.
  - Implication: shocks to inflation last much longer in Vietnam compared with other emerging Asian economies, possibly reflecting sluggish adjustment of inflationary expectations and/or more accommodative monetary policy.
  - Lagged GDP growth and lagged NEER movements had an important impact on headline inflation in Vietnam over the sample period, unlike in the other countries.
  - Neither lagged nominal interest rate nor lagged M2 growth had a significant impact on inflation for Vietnam or the other sample countries in this period.

### Policy-relevant implications (from the analysis)
- Short-term priority: monitor and manage nominal effective exchange rate movements because they are the main short-run driver of inflation.
- Medium-term priority: contain credit growth and manage demand-side pressures, since credit growth and GDP growth are principal medium-term drivers of inflation (2–10 quarters).
- Monetary policy transmission:
  - Raising the nominal interest (refinancing) rate reduces GDP growth and credit growth over the short- to medium-term, which can be disinflationary over time despite a short-run “price puzzle”.
  - Persistent inflation and high inflation inertia in Vietnam suggest that credible, forward-looking monetary policy and measures to anchor inflation expectations are important to reduce persistence.
- External price monitoring: continue to track import price deflator, oil and rice prices given their significant contemporaneous impact on domestic inflation.

*Italic: Source — IMF staff calculations and analysis in the provided content.*

### 1.03 percentage points. The empirical results also suggest that, unlike in the other emerging

### VI. POLICY IMPLICATIONS AND CONCLUSIONS

### Key empirical findings
- A depreciation of the nominal effective exchange rate by one percentage point is associated with an increase in inflation of 0.33 percent in Vietnam.
- Foreign inflation (as proxied by movements in the import price deflator) has a somewhat stronger impact on inflation in Vietnam compared with the other Asian emerging market economies in the sample.
- Credit growth has a significant positive impact on inflation over a medium-term horizon of 2-10 quarters.
- Positive shocks to real GDP growth tend to generate inflationary pressures after 4 quarters, with the impact lasting for the subsequent 5 quarters.
- Interest rate shocks tend to have a significant impact on GDP growth and on growth in credit to the economy over the short- to medium-term.
- There is a strong and significant relationship in Vietnam between inflation and growth of total credit to the economy; this relationship is not evident for inflation and growth of M2.
- The response of inflation to a rise in the nominal interest rate appears to be significant only in the first two quarters, and is positive.

### Persistence of inflation and cross-country comparison
- Vietnam shows a much higher degree of persistence in inflation than other emerging market Asian economies in the sample.
- A one percentage point of past inflation is associated with an inflation increase of about 0.87 in the current period in Vietnam—0.51 percentage points higher than the sample average.
- Lagged GDP growth and lagged movements of the nominal effective exchange rate had an important impact on headline inflation in Vietnam, unlike in the other countries in the region, over the sample period 2004Q1–2012Q2.

### Monetary policy transmission
- Interest rates in Vietnam do not seem to have a significant impact on headline inflation, neither in the short-term nor in the medium-term; this indicates a weak monetary policy transmission mechanism.
- The counter-intuitive positive short-term response of inflation to higher nominal interest rates could reflect a State Bank of Vietnam that has been rather passive instead of forward-looking in responding to inflation.
- Sluggish adjustment of inflationary expectations and/or more accommodative monetary policy in Vietnam may help explain higher inflation persistence.

### Policy recommendations
- First: Give the State Bank and Vietnam a clear mandate and greater autonomy to pursue price stability as its primary policy objective. The Law on the State Bank of Vietnam (passed in June 2010) did not give such a clear mandate, stating in Paragraph 1 of Article 4 that “The operations of the State Bank shall aim at stabilizing the currency value; ensure the safety of banking activities and the system of credit institutions; ensure the safety and efficiency of national payment system; facilitate the socio-economic development in a manner consistent with the socialist orientation.”
- Second: Fade away use of administrative controls on interest rates and on credit allocation and growth, allowing interest rates to be more market-determined over time.
- Third: Establish an interest rate corridor, incorporating both a lending rate and a deposit rate, as an important tool of monetary policy; the ‘corridor’ introduced in May 2008, comprised of the refinancing rate and the discount rate, does not create a true corridor for the interbank interest rate since both are, in effect, lending rates.
  - Note: Mohanty and Turner (2008) find that introducing a corridor for the daily interbank rate in India in 2004 resulted in a significant improvement in the Reserve Bank of India’s control over market interest rates.

### Data and estimation notes
- Dependent variable: CPI inflation. Fixed effects feasible GLS estimates with robust standard errors. Regressions estimated using GMM-IV.
- Sample period: 2004Q1-2012Q2.
- Countries included in comparative analysis: Indonesia, Philippines, China, Sri Lanka, Thailand, Malaysia, India, and Vietnam.

*Source: IMF staff calculations and text from the document (sample period 2004Q1–2012Q2).*

---


_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2013/_wp13155.pdf_