What Drives Persistently High Inflationary Pressures in Vietnam? Some Evidence From the New Keynesian Curve Framework

Abstract

In this study, we revisit the inflation process in Vietnam through the New Keynesian Phillips Curve (NKPC) model. We use monthly and quarterly data frequencies to track the forces driving inflationary pressures up to a quarter. Interest rate, an important determinant of inflation, is often found to give theoretically inconsistent result. Hence, we examine different interest rates, including, the central bank policy rate, lending interest rate and one-month interbank interest rates. Further, there is no unified approach to measuring the output gap – an important variable of the model - in the literature which may affect the results. Therefore, in this study, output gap is measured using two different approaches, namely, the linear trend model and the Hodrick-Prescott (HP) filter to see whether different measurement approaches matter for the signs and significance of this variable. Our key findings show that while the effects of interest rate vary by its type, measurement of output gap does not matter for the determination of inflation in Vietnam. What matters is whether the inflation model is quarterly or monthly. We explain the main determinants of inflation and provide some policy implications in the paper.

The Economic Impact of the US Unconventional Monetary Policy, Global Commodity Shocks, and Oil Price Shocks on ASEAN 3

“…The normalization of U.S. monetary policy is reflected in the tapering off, wherein the reference rate rises. The studies by (Antonakakis and Kizys, 2015); Kempa and Khan, 2017;Zhai and Morgan, 2016;Israel and Latsos, 2020;Klose, 2020;Maitra and Hossain, 2020;Nghiem and Narayan, 2021;Tiwari et al, 2019) reveal that the difference in interest rates between a developed country and a developing country causes a financial imbalance in the form of portfolio investment. Such a condition reverses capital flows into the developed nation, generating greater returns with minimal risk.…”

Inflation forecasting using autoregressive distributed lag (ARDL) models

“…It means the movement of both variables would continue in the long term. Nghiem and Narayan (2021) found that interest rate positively influences inflation. This is reversely expected.…”

Central Bank Independence and Price Stability Under Alternative Political Regimes: A Global Evidence

“…2 This is what is often described in the literature as time-inconsistency of commitment to price stability (see Barro and Gordon, 1983) where the pledge is to discretion, rather than rules, in the operation of central banks. 3 A number of other studies have examined different dynamics of inflation although without CBI (See, Nghiem and Narayan, 2021;Rizvi and Sahminan, 2020;Narayan, 2019;Salisu, Ndako and Oloko, 2019;Salisu, Isah, Oyewole and Akanni, 2017;Bathaluddin and Waluyo, 2011) Monetary Fund, 1999;Berger et al, 2001;Bernhard et al, 2002;Klomp and de Haan, 2010;Hayo and Hefeker, 2010;Arnone and Romelli, 2013). Conversely, there is no such evidence of a general relationship between CBI and inflation in the case of developing economies (see Bagheri and Habibi, 1998;Meade, 2007, 2008;Desai et al, 2003;Bodea and Hicks, 2015;Garriga and Rodriguez, 2020).…”