Degree Name

Doctor of Philosophy


School of Accounting, Economics and Finance


The transmission mechanism of monetary policy describes the dynamic stages in which a central bank’s monetary policies are transmitted to real output and prices. It plays a crucial, perhaps even central, role in the study of monetary economics. However, few studies have focussed on developing small, open economies, and even fewer have covered characteristics such as the aggregate demand components, the low independence of monetary policy, the weak developing financial markets and structural changes in the economy. Few quantitative empirical studies have been conducted on the monetary transmission mechanism in Vietnam, and they do not include a non-recursive structural vector autoregression model with structural breaks, and characteristics of a small, open economy. This study attempts to fill such research gaps.

The aim of this thesis is examining the role of monetary policy in the Vietnamese economy, in terms of shocks to the economy via different channels, and the international dimension of the monetary transmission mechanism in the small, open economy of Vietnam. To answer these questions, the study uses quarterly data for the period 2000:1 to 2011:4 and the Structural Vector Autoregression (SVAR) approach. The SVAR is more suited than the Vector Autoregression (VAR) approach to examining structural shocks as a test of multivariate models. The findings show that the statistically significant break dates are found in this study, so a dummy variable is included in the SVAR model of Vietnam.

The study’s findings reveal that the impacts of a monetary contraction on domestic variables are largely consistent with theories, except for its impact on price level. A monetary contraction causes the output to decrease, but weak. The monetary channels explain about 20 percent of fluctuations in real output. The higher output causes the domestic price to increase. A money shock is not a main reason in increasing the domestic price because of its small and statistically insignificant effects. Vietnam’s current price-controlling regimes are effective in ensuring price stability in spite of shocks in world oil and rice prices.

The outcomes of this research illustrate that the interest rate channel is the most effective channel for transmission to the price fluctuations and the exchange rate for output variations. The study found the stock price channel as the least effective, which is consistent with the modest role of the stock market in the Vietnamese economy. This limits the statistically significant contemporaneous effects of monetary policy (the interest rate and credit) on stock prices. The monetary aggregate could not be a reliable tool to contemporaneously transmit monetary policy signals to the financial market.

In addition, the study finds that domestic shocks have a more significant impact on the Vietnamese economy than foreign shocks do. Policymakers need to focus on solving the internal problems of the economy. However, they should keep a keen eye on some foreign factors in the short run because of significant effects of foreign output on domestic output, of foreign output on the monetary aggregate, of world gold price on the monetary aggregate, and of world rice price on the domestic price.

In the analysis of aggregate demand components, significant contemporaneous relationships (the domestic price-exports, the domestic output-imports, and exports-stock prices) are evident. These relationships suggest policymakers’ cautious consideration on the trade-off between economic growth and price stability. Imports and exports are quickly affected by a monetary contraction; however, negative impacts on import demand contribute to improvements in Vietnam’s trade balance in the short run. The credit channel plays an important role in trade activities. The role of the exchange rate channel is less for prices, imports, and exports. Finally, the results illustrate that the effects of a monetary contraction on private investment and private consumption are consistent with economic theory and expectation, but these responses occur in a short time. The influence of monetary transmission channels on private consumption is higher than that on private investment.

In this study, there is no evidence of the output and forward discount puzzles. The puzzles of price, liquidity and exchange rate are addressed but they are transitory, occurring in the short run and disappearing over time.

Based on the major findings, this study suggests some policy recommendations: (i) there is a need to focus on solving the internal problems of the Vietnamese economy to create a strong motivation for the development of Vietnam; (ii) monitoring the important transmission channels, including the interest rate, exchange rate and credit channels in formulating monetary policy; coordinating monetary policy with other policies to effectively control inflation in Vietnam.