Monetary in Vietnam: Alternatives to Inflation Targeting

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Monetary Policy in Vietnam: Alternatives to Inflation Targeting

Le Anh Tu Packard (

Fifth Draft July 2007

Paper prepared for the Political Economy Research Institute (PERI) at the University of Massachusetts, Amherst with support from the United Nations Department of Economic and Social Affairs (UNDESA). Earlier versions of this paper were presented to the May 2005 CEDES/Amherst Research Conference in Buenos Aires and the July 2005 Da Nang Symposium on Continuing Renovation of the Economy and Society. Financial support for this project has been provided by the Ford Foundation, UNDESA, and the Rockefeller Brothers Foundation. My gratitude and thanks go to two anonymous referees, Gerald Epstein, Erinc Yeldan, Jaime Ros, Lance Taylor, Per Berglund, and Phillipe Scholtes for their insightful comments and valuable ideas, and also to numerous colleagues in Vietnam including Dang Nhu Van for their helpful feedback. I am responsible for all remaining errors and omissions.

List of Acronyms and Abbreviations
ASEAN BFTV BIDV CEPT CIEM CMEA CPRGS DAF FDI FIE GC GDI GDP GNP GSO HDI IMF JV NEER ODA PE PER PRGF PRSC RCC REER ROSCA SBV SOCB SOE UCC UNDP VCP VLSS WTO Association of South East Asian Nations Bank for Foreign Trade of Vietnam Bank for Investment and Development of Vietnam Common Effective Preferential Tariff Central Institute for Economic Management Council of Mutual Economic Assistance Comprehensive Poverty Reduction and Growth Strategy Development Assistance Fund Foreign Direct Investment Foreign-Invested Enterprise General Corporation Gender-related Development Index Gross Domestic Product Gross National Product General Statistical Office Human Development Index International Monetary Fund Joint Venture Nominal Effective Exchange Rate Official Development Assistance Private Enterprise Public Expenditure Review Poverty Reduction and Growth Facility Poverty Reduction Support Credit Rural Credit Cooperative Real Effective Exchange Rate Rotating Savings and Credit Associations State Bank of Vietnam State-Owned Commercial Bank State-Owned Enterprise Urban Credit Cooperative United Nations Development Programme Vietnam Communist Party Vietnam Living Standards Survey World Trade Organization

1. Introduction Central Bank Policy: Vietnam Case Study One of the most important challenges facing policymakers is to determine how monetary policy should be conducted in order to meet their country’s national development goals. In recent years a growing number of central banks have convinced each other that the siren song of inflation targeting (IT) is worth pursuing, 1 even though a strong theoretical case that this monetary rule possesses superior welfare properties has yet to be established. IT calls for the "explicit acknowledgement that low and stable inflation is the overriding goal of monetary policy", which implies that a low inflation target should have supremacy over other development objectives. 2 For Vietnam, the quest for a pro-development monetary policy has become more urgent because the country is entering a new developmental phase that will be shaped by the terms of its accession to the World Trade Organization (WTO) and commercial treaties with its trading partners. Mindful of both the opportunities and risks that come with this phase, the Vietnamese government has been looking into macroeconomic and monetary policy guidelines to manage this period of unprecedented exposure to erratic swings in the world economy that include commodity price shocks and turbulence in global financial markets. In keeping with recent fashion among central banks, the State Bank of Vietnam (SBV) expressed interest in exploring the feasibility of inflation targeting. However, the general consensus 3 is that at present Vietnam does not meet the necessary conditions to implement an IT regime because the central bank lacks adequate tools to carry out an effective IT monetary policy. Additionally, other...
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