Analysis of Monetary Policy Shocks in the New Keynesian Model for Viet Nams Economy: Rational Expectations Approach

Abstract

The study estimates the SVAR model for Vietnam’s economy based on the New Keynesian model for the small open economy, taking into account the forward-looking behavior exhibited by economic agents. Deep structural parameters are identified by placing exclusion restrictions on the VAR innovations and the covariance matrix. The study affirms the important role of interest rates through monetary policy shocks in controlling inflation and macroeconomic stability. In addition, the exchange rate shock reflects Viet Nam’s exchange rate management mechanism, which is in line with the SBV’s management objective in an opened economy but with a controlled flow of capital. In addition, the aggregate demand shock shows the impact of interest rates and inflation on output volatility of the economy in the way of reducing interest rates, stabilizing inflation but increasing output, this is also the SBV’s final goal. In contrast, this study shows that the approach method is not general, has not set the rational expectations channel in combination with other transmission channels for analysis; the transparency, public credibility with the SBV policy or the control of capital flows in Vietnam are also a barrier for this channel to maximize its effectiveness. Finally, the study reaffirms the crucial role of monetary policy in managing monetary policy effectively, recommending the SBV to improve its planning, analyzing and forecasting policy towards a sustainable and stable growth.