Impact of fiscal and monetary policy on inflation in Vietnam

Trong Tai Nguyen,Ngoc Anh Tran,Thuy Duong Phan

doi:10.21511/imfi.19(1).2022.15

Trong Tai Nguyen, Ngoc Anh Tran + Show 1 more

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https://doi.org/10.21511/imfi.19(1).2022.15

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Abstract

High and sustainable growth of gross domestic product with stable inflation is one of the objectives of the most macroeconomic policies both in the world and in Vietnam. Therefore, price stability plays a vital role in assuring GDP growth. In order to stabilize prices, fiscal and monetary policies need to be appropriately managed. The aim of this study is to assess the impact of the monetary and fiscal policies on inflation in Vietnam during the period from 1997 to 2020. This study has applied the vector autoregression (VAR) model along with data gathered from the World Bank and General Statistics Office of Vietnam. The research results indicate that Vietnam’s inflation is positively influenced by a fiscal deficit (2.943), money supply (2.672), government expenditure (8.347), and interest rate (3.187). Among the factors, government expenditure has the biggest influence on inflation. Besides, trade openness (–0.311) also influences inflation, but the effect is negative and negligible. Finally, the policy implications are focused on coordinating fiscal and monetary policies maintaining a moderate level of inflation for economic growth. AcknowledgmentThis article is funded from the funding source of the research: “Solutions to deal with the risk of financial instability from support packages to fight economic recession caused by the covid-19 pandemic” with code B2022-MHN-02 by Vietnam Misnistry of Education and Training.

Highlights

Promoting the growth of the economy and stabilizing the inflation rate are the main goals of macroeconomic policies such as monetary policy (Nguyen, 2015)
Jha and Dang (2012) demonstrate that if the inflation rate is more than 10%, the volatility of inflation negatively affects the growth of the economy
H2: Government expenditure has a positive rela- vector autoregression (VAR) estimation requires the variables in the modtionship with inflation

Summary

Introduction

Along with the benefits from economic integration, the financial and economic crisis risks are difficult to predict. Promoting the growth of the economy and stabilizing the inflation rate are the main goals of macroeconomic policies such as monetary policy (Nguyen, 2015). Economic support packages to combat recession have the potential to cause financial instability, and one of the indicators of such instability is increasing inflation (Claeys & Darvas, 2015). Moderate inflation has a stimulating effect on the growth of the economy, while galloping inflation and hyperinflation have reverse effects, especially hyperinflation. Many studies have shown a non-linear relationship between economic growth and inflation rate (Pattanaik & Nadhanael, 2013). Jha and Dang (2012) demonstrate that if the inflation rate is more than 10%, the volatility of inflation negatively affects the growth of the economy. A low inflation rate will hinder the growth of the economy (Temple, 2000). The cause of increasing inflation is the influence of both monetary policy and fiscal policy (Fischer et al, 2002; Surjaningsih et al, 2012)

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