Abstract
This study sheds new light on the relationship between monetary policy and private investment using Vietnam’s provincial data and a system generalized method of moment (GMM) framework. To capture monetary policy’s effect, different indicators, viz. money supply, domestic credit to the private sector, interest rate and exchange rate are examined. We find that private investment is positively affected by respective monetary policies through broad money, domestic credit and interest rate channels, yet no credible evidence regarding the exchange rate’s effect. In which, such a surprising co-movement between real interest rate and private investment was illuminated through analysis of the economy’s distinctive characteristics over the two development stages (pre- and post-2012). Another notable finding is that economic development prospects of localities, which attract great attention and cause an intense competition between domestic and foreign investors, appear to be a major barrier to investment decisions of private firms.
Highlights
Investment is an important component of aggregate demand and a vital resource for economic growth as it helps expand the production capacity of the economy
During 2009–2017, private investment in localities accounted for 23% of the gross domestic product (GDP) on average, in which the lowest level of investment at 1.14% of GDP was recorded by Ba Ria—Vung Tau province in 2011 and the largest at 71.41% of GDP was achieved by Lai Chau province in 2009
This study explores the relationship between monetary policy and private investment for Vietnam
Summary
Investment is an important component of aggregate demand and a vital resource for economic growth as it helps expand the production capacity of the economy. Investments in banks and financial institutions help to promote the circulation of funds in serving the operation of the economy. Investment could, directly or indirectly, raise capital for the economy through promoting technology development. They stressed the importance of investment climate in the capital movement process, especially regarding private investment. Monetary policy aims to address issues arising from economic instability. In this regard, Khan (2011) argues that the objectives of monetary policy interact back and forth with other important macroeconomic
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