Welfare consequences of inconsistent monetary policy implementation in Vietnam

Abstract

We develop a New Keynesian model featuring Calvo price setting and Calvo wage setting to quantify the welfare consequences of shifting trend inflation in Vietnam. To capture the characteristics of the Vietnamese economy, we use the Simulated Method of Moment and calibrate parameters jointly to match the important selected moments of Vietnamese data. The results show a severe consequence of a constant positive trend inflation and an exogenous shock to trend inflation, especially when a central bank sets a high level of inflation target. Among staggered price and wage contracts, the latter play a vital role in transmitting the adverse impacts of constant and shifting trend inflation into the economy. Based on our analyses, raising inflation targets would seem to be a bad policy prescription in Vietnam.

Effects of trend inflation on monetary policy and fiscal policy shocks in Vietnam

“…Table 1 reports these facts. Following Ha et al (2020a), we also document the evidence of time-varying trend inflation in Vietnam during the 1996–2015 period as in Figure 1. Therefore, the Vietnamese economy was simultaneously buffeted by inefficient implementations of monetary and fiscal policies as well as time-varying trend inflation.…”

“…This paper extended the New-Keynesian model in Ha et al (2020a) by two dimensions. We assumed that the monetary authorities employ two instruments: nominal interest rate and money supply to conduct the policies.…”

“…The present article follows Ha et al (2019, 2020a, b) to use the perturbation method to compute the approximation to the policy functions around the deterministic steady-state. We then use those to quantify the welfare.…”

“…First, the papers examining the effects of trend inflation on the dynamics of the economy to the policy shocks, especially fiscal policies are very scarce. Regarding monetary policy shocks, the prior scholars mostly concentrate on the case that the central banks employ the nominal interest rate as an important instrument, while they have abstracted a comparison of the efficiency in using the different tools in the economy with Source(s): General Statistics Office of Vietnam and Ha et al (2020a) Table 1. Objectives and performances of monetary policy in Vietnam (2000Vietnam ( -2015 Figure 1.…”

“…Similar evidence on effects of trend inflation on the marginal efficiency of investment (MEI) shocks or monetary policy uncertainty shocks are also provided by Ascari et al (2018) and Ha et al (2020b), respectively. Second, Ascari and Sbordone (2014) and Ha et al (2020a) provide empirical evidence that changes in trend inflation are associated with the ability of the monetary authority to guarantee a determinacy region and macroeconomic stability. However, this paper only concentrates on the interest rate rule while the change in determinacy regions when the monetary authority uses the money supply instrument has not been argued so far.…”