Điều hành chính sách tiền tệ theo mục tiêu lãi suất tại việt nam tt tiếng anh

MINISTRY OF EDUCATION AND TRAINING

STATE BANK OF VIETNAM

BANKING ACADEMY OF VIETNAM

VU MAI CHI

INTEREST RATE TARGETING OF MONETARY POLICY
OPERATION IN VIETNAM

MAJOR

: BANKING AND FINANCE

CODE

: 9340201

SUMMARY OF DOCTORAL THESIS IN ECONOMICS

HANOI - 2019


THIS THESIS IS COMPLETED AT
BANKING ACADEMY OF VIETNAM

Supervisors:
1. Dr Bui Tin Nghi
Banking Academy of Vietnam
2. Dr Vo Tri Thanh

Central Institute for Economic Management

Referee 1:............................................................................................................
................................................................................................................................

Referee 2:..............................................................................................................
................................................................................................................................

Referee 3:...............................................................................................................
................................................................................................................................

This thesis will be examined byExamnination of Banking Academy of Vietnam
at

The thesis can be found at:
- National Library of Vietnam
- Banking Academy Library

on the

of

in the year 2019


LIST OF WORKS RELATED TO THE THESIS HAS BEEN PUBLISHED
A. Scientific articles, scientific proceedings
1. Vu Mai Chi (2016), "State Bank of Vietnam’s operation of reserve requirement
instruments in the recent time and some recommendations", Financial & Monetary Market
Review Vol. 15, 2016.

2. Ha Thi Sau, Vu Mai Chi (2016), "Using open market operations for development of
Vietnam’s monetary market", Vietnam Banking Review.
3. Ha Thi Sau, Vu Mai Chi (2018), "Banking inspection and supervision for the
restructuring of credit institutions and assurance of the safety of operation of Vietnam's
banking system", Proceedings of the Scientific Conference May, 2018.
4. Vu Mai Chi, “Non- traditional monetary policy to enhance the effectiveness of
interest rate transmission channel, implication for Vietnam to improve monetary policy”
International Conference: "Evolution of Monetary Policy Framework after the Global
Financial Crisis", December, 2017.
5. Vu Mai Chi, “The effectiveness of interest rate transmission channel in Vietnam”
Vietnam Socio-Economic Development, Vol. 92, 2018
6. Vu Mai Chi (2018), "Evaluating the transmission mechanism of the State Bank of
Vietnam’s monetary policy over the recent time", Vietnam Banking Review, Vol. 16 August
2018
7. Ha Thi Sau, Vu Mai Chi (2018), "Banking inspection and supervision operations of
the State Bank Vietnam and some recommendations", Banking Science & Training Review,
Vol. 195, August 2018.
8. Vu Mai Chi, Tran Anh Quy (2018) "Bad debt handling in Vietnam over periods:
Concerns and recommendations", Vietnam Banking Review, Vol. 21, November 2018.
9. Vu Mai Chi (2018), "Macro safety policy framework: World’s experiences and
recommendations for Vietnam", National Conference Article, 2018.
10. Vu Mai Chi (2019), "The framework for operation of the State Bank’s monetary
policy from 2012 to present: Some judgments and recommendations", Financial & Monetary
Market Review, No. 20, 2019.
B. Research Projects
1. Nguyen Thi Hong (2015), "Improving the operation efficiency of open market operations",
Code: DTNH.02 / 2014 of State Bank, Sectorial Research Project (member)
2. Pham Chi Quang (2018), "Monetary policy transmission mechanism for period 2006 -2016:
Basis for formulation of a framework for monetary policy operation in Vietnam", Sectorial
Research Project (member) .

3. Nguyen Tuong Van (2019), Financial education – World’s experiences and policy
recommendations for Vietnam, Sectorial Research Project (member).
4. Ngo Kim Thanh (2019), Flexible Inflation Targeting (FIT) and implications to Vietnam's
policy framework, Grassroots Research Project (member)


INTRODUCTION
1. The necessity of the research
Monetary policy has been always a magnet for scholar interest in a global scale, as
the recent years have seen a variety of research works delving into the selection of
operational targets that intensify the effects and efficacy of monetary policy, thereby
enforcing the roles and intervention of State Bank in the economy - finance and monetary
markets. Theoretically, subject to the movements of the monetary market and specific
national economic environment, state banks may choose different operational targets
including monetary aggregates (credit, money supply) or price (interest rates, exchange
rates) and adopt monetary policy instruments to achieve these goals,
In previous decades, monetary controls and regulation of the ability to supply credit
to the economy proved a contributory efficacy against inflation 1. However, parallel to the
faster evolution of the market economy, the link between monetary indicators and inflation
and economic growth as the ultimate goals has turned weaker. This explains why the
Central Bank of developed countries (namely America, England, Germany, Japan) and
developing countries (Thailand, Malaysia, etc.) have put down the monetary aggregate
targeting and shifted to the price targeting (interest rate targeting). In deed, they admirably
succeeded in constraining the inflation and stabilizing the economic growth. In those
countries pursuing an inflation targeting framework (such as Australia, Canada, Finland,
New Zealand, Spain, Sweden, England), monetary policy makers also use interest rates as
the key variable to achieve the target inflation rate.
In the Vietnam’s context, on the other hand, State Bank of Vietnam mainly have
pursued the money supply targeting of the State Bank's monetary policy, particularly: (i)
Before Vietnam’s admission to WTO (2001-2006), the State Bank of Vietnam (State Bank)

basically aligned its monetary policy along money supply targeting and prioritized
economic growth as the ultimate goal upon annual approval of the National Assembly
(about 7-8% / year in average), rather than persevering in attempt to constrain inflation; (ii)
From 2007 to 2011, State Bank's monetary policy persisted in the monetary aggregates with
an inclination to economic growth without long-term orientation and perseverance in
inflation control. Nonetheless, under the pressure of Vietnam's deeper integration regionwide and world-wide, the domestic economy was generally exposed to the fluctuations of
capital flows and prices in the international market, which weakened the curb of State Bank
on monetary indicators. Although the monetary policy in this period somewhat succeeded in
accelerating the economic growth, such thriving was not stably maintained over the years,
1

Typically, in the 1970s large industrial countries such as the US, UK, Germany, selected money supply targeting (M1,
M2, or credit growth) to deal with the highest inflation after World War II and the collapse of Bretton Wood System
due to swelling demand for loans in many countries and deficit of current account in the US.

1


as inflation hiked and interest rates climbed, which lead to monetary market unrest.
Production and business faced hardship, especially during the global financial crisis (2008).
(iii) From late 2011, in compliance with Resolution No. 11 / NQ-CP on major solutions for
controlling inflation, stabilizing the macroeconomy and ensuring social security, the State
Bank step by step tried combining the monetary and price channels (interest rate, exchange
rate) of monetary policy by issuing at the year beginning State Bank’s Directive 01 on
orientation for M2 growth, credit, reduction of deposit and lending interest rates and
commitment of exchange rate adjustment. As a result, the monetary policy solutions proved
their proactive and flexible effects and appropriateness to the actual situation. Inflation
dropped from double digit (8.13%) at the end of 2011 to 2.66% in 2016, marking the
longest period of inflation calmness in the last decade. This greatly helped maintaining the
macroeconomic stability and supporting economic growth (from 5.25% in 2012 to 6.21% in

2016). (iv) Since 2017, the world and domestic economy has recovered under favorable
conditions such as low inflation, high international payment balance; but monetary policy
has encountered new challenges coming from the fluctuation of exchange rates under the
devaluation and fierce vacillation of currencies in Vietnam’s reference basket. This, on one
hand, impacts the competitiveness, and on the other hand requires to maintain the
macroeconomic and financial stability against a vulnerability worsened by a high economic
openness. As such, the monetary policy would further head for a synchronous and flexible
combination of M2 controls and curbs on credit at an appropriate level, constraint of
inflation, more attention to a proper meditation of VND liquidity, in order for a stabilized
foreign currency market and exchange rates. This sometimes lead to some upsurge or sharp
fall of market short-term interest (2016 – 6 months / 2018 ) against a steady low inflation
level. This revealed how the State Bank's current monetary policy is confusing and
inconsistent with the interest rate-targeting approach.
Driven by the successes achieved in period 2011-2016 and pressure of the deeper
economic integration and exposure to external shocks, many international think tanks and
experts2 recommended Vietnam to make a complete transition from monetary to interest
rate channel of monetary policy, so as to control and maintain a low inflation level in the
long term. Moreover, the increasingly growing and changing financial and monetary
markets require a more flexible monetary policy of the State Bank 3, and reduction of
administrative interventions, so that the market can develop in its natural way and become
an effective capital supply channel that transmits the effects of monetary policy and regulate
market interest rates. Besides, recent movements of interest rates revealed that the economic
2

IMF (2014) recommended SBV to keep improving the operation of monetary policy towards increased role of price
signals (mainly interest rates) in the economy.
3
Focusing controls on the money supply limited the proactivity of the State Bank in regulating the market, which may
cause fluctuations of market interest rates, especially interbank rates.

2


reactions to changes in interest rates have appeared abundantly parallel to the acceleration of
financial market, while credit institutions have become more responsive and caught up on
State Bank's interest rate signals. On the other hand, the 4th Industrial Revolution 4.0
outbreak over all aspects of life along with the birth and growth of new Fintech-based
financial and banking services that can substitute the functions of money has shaken the
linkage between monetary indicators and economic growth and inflation 4. In replacement,
price (interest rates) signals will be the key factor for Central Banks to achieve their
monetary policy goals.
Based on the above judgments and pursuant to the two key tasks of the State Bank's
monetary policy as outlined in the Development Strategy of Vietnam Banking Sector to
2025, with Orientations to 2030, which was issued under Decision No. 986 / QD-TTg dated
August 08, 2018 of the Prime Minister: (i) "To complete a monetary policy framework that
aims to control inflation, stabilize the currency value, contributing to maintaining the
macroeconomic stability, creating conditions for raising the efficiency of mobilizing and
allocating the capital sources in the economy, promoting sustainable growth; Increasing the
independence of the SBV in the management of the monetary policy”; (ii) “To redirect the
regulatory channel of monetary policy from money supply to interest targeting; using
indirect instruments toward gradual elimination of interest rate administrative interventions
as practicable; continuing open market operations as the primary tool that mediates the
available capital of credit institutions, in order to achieve the monetary policy goals from
time to time", it can be said that an in-depth exploration of the transition into interest rate
targeting of monetary policy should be conducted, in order to enhance the effectiveness and
efficacy of the monetary policy.
That is why the PhD student take "Interest rate targeting of monetary policy
operation in Vietnam” as her doctoral thesis title. The thesis will focus on analyzing and
evaluating data, verify the transmission mechanism of the interest rate targeting, thereby
assessing the feasibility of operation of the target rate in Vietnam, comparing empirical

findings in Vietnam’s context with international evidences, and eventually recommending
solutions.
2. Literature review
2.1. Foreign researches
- Many foreign studies have pointed out the shortcomings of money supply targeting
(i) The correlation between monetary supply and the ultimate targets (inflation, growth) and
interest rates became increasingly weaker and brittle (Goldfeld and Sichel, 1990; Benati and
4

Frederic S. Mishkin-2000, Enzo Croce and Mohsin S. Khan -2000, Don Nakornthab-2009, argued that the more the
financial market grows, the less sustainable the relations among monetary targets (such as M2 growth, credit) and
ultimate targets of inflation and economic growth become. Therefore, it is necessary to think twice about using
monetary indicators as the target of monetary policy.

3


Goodhart, 2010; Lucas Jr. and Nicolini, 2015). Hagen and Hofmann (2009) identified the
increasingly feeble link between inflation and economic growth, implying that signs of
inflation pressure from money supply growth or economic growth viewpoint has been
nullified. Frederic S. Mishkin (2000) analyzed the money supply channel of monetary
policy in 5 countries (USA, England, Canada, Germany, Switzerland) from 1970 to 1980
and found that the pursuit of monetary supply control was rather ineffective due to the loose
tie between monetary indicators and inflation and growth. Mishkin and Savastono (2000)
pointed out drawbacks of money supply targeting, especially in the context of low inflation
and an escalating financial integration; (ii) Money demand function becomes less and less
reliable: Bahmani - Oskooee and Rehman (2005) studied seven Asian emerging countries
and found that many of them had an unstable money demand, namely Malaysia, Pakistan,
Philippines and Thailand. Hassan, Ali and Dawood (2016) examined the money demand
function in Pakistan between 1972 and 2013 and concluded that the money demand function

became unstable and susceptible to various macroeconomic factors. Jiranyakul, K. and
Opiela, T.P. (2014) argued M1 fluctuations were provisional, so it was difficult for Thailand
to use M1 as an intermediate target. Avouyi-Dovi, Drumetz and Sahuc (2012) proved the
instability of money demand function in the Euro zone. Wei Liao and Sampawende J.-A.
Tapsoba (IMF, 2014) argued that the rapid development of a market-oriented financial
system lead to the instability of money demand function and a faster interest rate
liberalization in China.
- Researches share a conclusion on recommendation for Central Banks to redirect
their monetary policy toward price (interest rate) targets against the context of well
controlled inflation, higher advancement of financial & monetary market and deeper
international integration: William Poole (1994) concluded constraint of money supply was
important to deal with high inflation of 20%, 50% or 200%, but for low inflation, the
relation between money supply and inflation became unreliable. Cagan (1956) found that in
a hyperinflation period, the latency of money supply’s effects on inflation could be just a
few weeks. Kerstin Mitlid and Magnus Vesterlund (2001) stated that under a developed
ground of financial market, technology and payment systems, monetary policy tended to
influence the monetary market interest rates through overnight interest rates rather than via
the supply of money. Ho (2008) emphasized the constant effort of both developed and
developing countries to research and complete their interest rate targeting. Maehle (2014)
said that monetary indicators would be gradually replaced by price (interest rate) targets
through a cross-check mechanism of price targets (interest rates). Bindseil (2016) reaffirmed
the importance of an interest rate corridor and short-term interest rate targeting for an
effective organization of money market.

4


- Investigations into regulatory experiences of developed and emerging countries
revealed that most countries choose interest rates as the pillar for their new monetary
policy framework: the US Federal Reserve (Fed) focused primarily on interest rate targets.

The Bank of England (BOE) removed the monetary supply targets and used interest rates as
the base for implementation of an inflation-targeting monetary policy framework (1990). At
the same time, European Central Bank (ECB) and Central Banks of industrialized countries
with thriving financial markets (New Zealand, Sweden, etc.) also inclined to interest rate
targets when realizing their monetary policy. The Central Banks of Malaysia, Thailand,
Philippines and South Korea also used monetary policy instrument to influence the
economy through market principles (prices).
- Most of countries that adopt the inflation-targeting monetary policy framework often
considers interest rates as the main and critical transmission channel that mirrors
regulatory signals: Don Nakornthab (2009) concluded that since the 1997 -1998 crisis,
Thailand has shifted to the inflation targeting monetary policy framework and used policy
rates to influence the short-term market interest rates. Works of Hannan and Berger (1991)
and Neumark and Sharpe (1992) concerning interest rate adjustments in the United States
banking were developed by Cottarelli and Kourelis (1994) and Borio and Fritz (1995),
pointing out a delayed efficacy of interest rates in short-term, but flawless transmission of
effects in long term. Mojon (2000), Toolsema et al. (2001), De Bondt (2002), Sander and
Kleimeier (2004) and De Bondt (2005) concerning the Euro zone argued that the
transmission of effects from monetary market interest rates to banking rates is not optimal.
Kwapil

and Scharler

(2010)

used the

Engle-Granger cointegration method and

autoregressive distributed lag (ARDL) model to point out a faster transmission of the
interest rate targeting in the US than that in the Euro zone.

- All studies on the influence mechanism and efficacy of monetary policy via
channels, especially interest rates, used VAR models as methodology: normal VAR,
structural VAR (SVAR), FAVAR. A variation of VAR model, which is Vector Error
Correlation – VEC, was particularly preferred. Disyatat and Vongsinsirikul (2003)
estimated the original VAR model using classic variables such as output, inflation, base
rates, exchange rates per quarter during period 1993-2001 of Thailand. Poddar, Sab and
Khachatryan (2006) researched on the effects of monetary policy on a small economy like
Jordan by running the VAR model for period 1996-2005, using fixed variables such as
output, foreign exchange reserves, interest rate difference between local currency and USD.
Fed San Francisco Fed also used FAVAR model to evaluate the efficacy of China’s
monetary policy in period 2000-2011. It was common that studies based in small open
economies used SVAR, for examples: Cushman and Zha (1997), Brischetto and Voss
(1999), Dungey and Pagan (2000), Parrado (2001), and Buckle et al. (2007).
5


2.2. Domestic researches.
- Domestic researches indicated a loose relation between monetary targets and
inflation and recommended for reliance on interest rate targets: Hung and Pfau (2008) said
that M2 causally impacted on output but did not on inflation during period 1996-2005. IMF
(2003, 2006) concluded on the that instable influence of M2 with about 12 -month latency
on inflation. Minh (2009) and Nguyen and Nguyen (2010) argued M2 had negligible
impacts on CPI with a latency of about 5 months or longer. Camen (2006) supposed that M2
growth explained less than 5% of inflation fluctuations during period 1996 -2005. This is
due to the instability of money demand function. Christopher Adam, Michael Goujon and
Sylviane Guillaumont Jeanneney (2003) concluded on an inclination of industrialized
countries to put down monetary targets and take up interest rates. Ha Huynh Hoa (2010), Le
Thanh Tung (2015) demonstrated an one-way causal relation from interest rates and
exchange rates to money demand and the one-way causal impact of money demand on
growth which was represented by high inflation risk. Bui Van Hai and Tran Thi Minh Trang

(2015) noted interest rates and money demand as two important factors affecting output.
- Previous studies focused on analyzing the relationship between monetary policy and
macroeconomic policies, post-crisis experiences and solutions for improvement of monetary
policies: Nguyen Thi Kim Thanh 2004, Duong Thu Huong 2005, Nguyen Ngoc Bao 2008
examined the relationship between macro accounts and monetary policy establishment and
operation against the context of capital transaction liberalization. Some researchers
dissected the use and improvement of monetary policy instruments and transmission of
monetary policy effects (Nguyen Thi Kim Thanh 2005; Tran Thi Loc 2002). Ha Thi Sau
(2016) delved into the credit risk channel of credit institutions to explain the transmission of
monetary policy’s impacts on the ultimate goals in the wake of the financial crisis. Chu
Khanh Lan (2017) investigated the unconventional monetary policy applied by Central
Banks of some developed countries.
- Unlike this thesis, recent studies were inclined to application of inflation targeting
monetary policy framework: previous studies such as Tran Thi Loc; Nguyen Van Ha
(2007); Nguyen Huu Nghia (2005), Do Thi Duc Minh (2006). Typically, To Anh Duong et
al (2012) measured the feasibility to apply the inflation targeting framework, conditions and
roadmap for application in Vietnam. Recently, Vo Tri Thanh (2016) and Nguyen Thi Hien
(2016, thesis) have evaluated the monetary policy framework of Vietnam and the benefits as
well as conditions needed for the transition to the inflation targeting framework.
- Related studies often focused on assessing and analyzing interest rate policies or
impacts of State Bank’s regulatory interest rates without insights into the practice of
regulatory target selection: To Kim Ngoc (2003, thesis) examined the efficacy of
Vietnam’s monetary policy via the use of State Bank's interest rate instruments in period
6


1995-2002. Nguyen Ngoc Bao (2005, thesis) revealed the impacts of interest rate policies
on macroeconomic variables. Nguyen Thi Kim Thanh (2010) probed the impacts of real
interest rates on economic growth using OLS model. To Anh Duong (2015) implied the
bigger role of interest rates in transmission of monetary policy’s effects and a greater

sensitivity of investors to interest rates. Work of Duma and Ha Nga (2013) argued that the
efficacy of interest rate channel was still weak while the lending interest rates were more
and more responsive to State Bank's interest rate policies, against the declining impacts of
the credit channel.
Nguyen Thanh Nhan (2016, thesis) has recently analyzed the efficacy of interest rate
channel in monetary policy of Vietnam in period 2006-2015. Bui Quoc Dung (2017)
provided quantitative and qualitative evaluation of the transmission mechanism of monetary
policy in Vietnam in general and efficacy of interest rate channel in particular.
- Quantitative studies often used VAR models to assess the efficacy of monetary policy
through channels: Le and Pfau (2008) developed a VAR model and found no significant
impacts of interest rate channel, yet a strong influence of money supply on production.
Camen (2006) used an original Baysian VAR model to verify the efficacy of monetary
policy. Bhattacharya and Duma (2012) studied Vietnam's monetary policy between 2004
and 2012 using SVAR model and pointed out that interest rates only affected inflation for a
short time; Nguyen Thi Lien Hoa and Dang Tran Dung (2013) also used SVAR method and
came up with a weak impact of exchange rate and interest rate and strong impact of M2
with a 6-month latency on inflation. VAR-based study of Tran Thi Xuan Huong et al.
(2014) concluded that post-crisis increase of interbank interest rates lead to the upsurge of
lending interest rates. Nguyen Thi Thuy Vinh (2015) investigated the transmission channels
of monetary policy based on VAR model and data from 1995 to 2009. Bui Van Hai and
Tran Thi Minh Trang (2015) used VAR model to record interest rates and money demand as
two essential factors affecting output. Pham Tuan Anh (2016) conducted his research based
on VAR / SVAR model and monthly data obtained from 1995 to 2013. Nguyen Phi Lan
(2016) used SVAR model to assess the efficacy of monetary policy transmission channels.
Bui Quoc Dung (2017) has recently used VAR model to demonstrate how well inflation
targeting may help control inflation for the period from 2011 to present. Pham Chi Quang
(2019) studied the transmission mechanism of monetary policy for period 2006 -2016 using
VARs and VEC variations, Engel-Granger regression model.
3. Uncharted researches: filling the gap
Literature review shows that previous studies left certain uncharted domains,

specifically: (i) Studies primarily approached interest rate as a money policy instrument or
merely listed and qualitatively assessed the effectiveness and efficacy of interest rates; not so
many works considered interest rate as a regulatory target for evaluation and elaboration of
7


recommendations to improve the enforceability of monetary policy; (ii) Those works, though
found out the shortcomings of monetary policy choosing money supply targeting, have not
given any deep insights that enable a convincing rationale for the complete transition into the
interest rate targeting for Vietnam’s context; (iii) Most of the studies delved into the efficacy
of monetary policy transmission channels by analyzing the impacts of these channels on
macro variables, rather than setting up an operation mechanism of interest rates in Vietnam.
Such uncharted domains of research should be reached out, by an in-depth
investigation into the theory and practice of interest rate channel transmission mechanism and
impacts of interest rates as the key target of monetary policy; and at the same time,
exploration into world’s experiences and lessons related to interest rate transmission
mechanism, especially after the global crisis (2008). This would allow intensive analysis and
determination of necessary conditions for transition from money supply targeting to interest
rate targeting of monetary policy in Vietnam, method to select base rates and set up the
interest rate corridor model, etc., and eventually highest achievement of monetary policy
targets.
7. Thesis outline
Beside the introduction, conclusion, list of references and appendices, the thesis is
structured into 4 chapters as follows:
Chapter 1: Theories of monetary policy and interest rate targeting of monetary policy
operation.
Chapter 2: World’s experiences in transition into interest rate targeting of monetary policy
operation and lessons for Vietnam.
Chapter 3: Recent practice of monetary policy implementation and feasibility to apply
interest rate targeting in Vietnam.

Chapter 4: Recommendations and solutions for transition into interest rate targeting of
monetary policy operation in Vietnam.

8


CHAPTER 1: THEORIES OF MONETARY POLICY AND INTEREST RATE
TARGETING OF MONETARY POLICY OPERATION

1.1. Fundamentals of monetary policy
1.1.1. Definition of monetary policy: "Monetary policy is a process by which the Central
Bank or a monetary authority of a country adopts the overall realization of measures and
use Central Bank's instruments to control the money supply, currency availability and
monetary costs, in other words, interest rates, to achieve targets in terms of inflation
control, economic growth, macroeconomic stability or other macro targets from time to
time”.
1.1.2. Targets of monetary policy
- Ultimate targets
- Intermediate targets
- Operational targets
1.1.3. Instruments of monetary policy
- Direct instruments
- Indirect instruments
- Unconventional instruments
1.1.4. Transmission mechanism of monetary policy
- Conventional interest rate channel
- Credit channel
- Exchange rate channel
- Other property price effect channel
1.1.5. Frameworks of monetary policy

- Exchange rate targeting framework
- Monetary targeting framework
- Inflation targeting framework
- Underground targeting framework
1.2. Rationale of interest rate targeting of monetary policy operation
1.2.1. Definition of interest rate and interest rate targeting of monetary policy
- Definition of interest rate and affecting factors
- Definition of interest rate targeting of monetary policy
Interest rate targeting of monetary policy refers to the case when the Central Bank
sets up operational targets as short-term interest rate variables (typically overnight interest
rates or up-to-3-month rates) and intermediate targets as medium and long -term interest
rate variables (business interest rates of banks - deposit / lending interest rates), while
determining the target interest rate (policy interest rate) and regulating the interest rates

9


under monetary policy in order to influence the economy and eventually achieve the
ultimate goals of inflation or economic growth.
- Advantages: Convenient for observation, control and implementation; shorter
temporal latency; direct effects on the spending and investment; effective support to an
economy in recession period:
- Disadvantages: Temporal latency; requiring determination of the degree of interest
rate changes; cumulative effects; risk of liquidity trap.
1.2.2. Interest rate targeting of monetary policy operation by the Central Bank
 Setting up the target interest rate: This is the base interest rates of the Central Bank,
which is announced officially or informally. The manner to operate this interest rate
depends on national specific conditions. Basically, there are two approaches to base interest
rate (or target interest rate) as follows:
(i) Base interest rate is the interest rate of an instrument/operation of Central Bank

that supplies (for cases of England, Europe, Thailand, Philippines) or absorbs liquidity (for
Czech Republic, Japan, etc.). Thus, the transmission of monetary policy to the monetary
market and other markets is often mediated by price difference.
(ii) base interest rate is the market interest rate (usually concurring overnight or 1week interbank interest rate): Central Bank shall clearly announce the target interest rate and
regulate the system liquidity so that the market interest rate stays close around the target.
This is the case of the US, Australia and New Zealand.
 Developing an interest rate corridor system
According to IMF (2014; 2015) works on interest rate targeting of monetary policy
operation in advanced and emerging countries implied that most countries enforced their
monetary policy in accordance with the two following models:
(i) Floor interest rate corridor system including: (1) Floor System (with base
interest rate as the floor); and (2) Tiered-Floor System (with two tiers of floor interest rate).
(ii)

Mid-rate corridor system including: (1) Mid-corridor system targeting a

market rate, applied in the US, Brazil, Canada, Chile, Czech Republic, Mexico, Sweden,
etc.; (2) Mid-Corridor system with the Policy rate attached to a central bank instrument).
Nonetheless, in fact there may be many variations of the above two systems or even
other interest rate corridor frameworks that fit the financial structure and monetary policy
framework of specific countries.
 Determining the target interest rate
The most well-known principle for determination of base interest rate is the Taylor
Rule, developed on the actual prices and output - which are general economic goals of most
Central Banks in the world. This makes Talor Rule outperform those rules based on money
10


supply or exchange rates. Talor Rule is used in 2 cases: (i) interest rates are considered as
inputs for elaboration of policies; (ii) interest rates are used to describe important relation

between inflation and employment, prices and actual output.
1.2.3. Transition from money supply-targeting to interest rate targeting operation of
monetary policy
 Overview of monetary aggregate-targeting operation of monetary policy
Monetary based/targeting operation of monetary policy refers to the procedure where
the Central Bank sets up monetary aggregate (MB) as the operational targets and
intermediate targets of monetary policy, including MB / M1, M2 or M3, so as to realize the
monetary policy and achieve the ultimate goals of inflation or economic growth. This
operation framework is based on the following factors: (i) Central Bank operates the
monetary policy based on the monetary supply indicator; (ii) Discloses targets for the
selected monetary supply indicator; (iii) Explain when the actual indicator fluctuates beyond
the target range.
- Advantages: Observability of monetary supply; Fast and strong impacts; increased
accountability for constraint of inflation.
- Disadvantages: requiring assurance of a close relationship between intermediate
targets and ultimate targets; less effective for increasingly developed economy and finance;
complexity of money supply - demand fluctuations, which are not understandable to the
public.
 To differentiate interest rate targeting and money supply targetiong operation
 As regard to the transmission mechanism: in short term, Central Bank may by its
monopoly create a monetary base (MB) and determine the interest rate i or the
amount of money supply by fixing the money base or interest rates. In the long
term, Central Bank can only choose either monetary supply or interest rate
approach to the operation of monetary policy.
 Regarding the characteristics and application conditions: (i) If the Central Bank
chooses monetary supply targeting; (ii) If the Central Bank selects price (interest
rate) targeting
 Reasons for the transition from monetary supply targeting to interest rate
targeting
First, the instable relationship between monetary supply and inflation or economic growth

Second, assumptions of the monetary theory are in deed no longer fit the current conditions.
Third, the interbank monetary market operates more efficiently and has better liquidity,
which empowers interest rates to better transmit the signals of monetary policy.

11


Fourth, stable macroeconomic environment, well-controlled inflation, wide-ranging
liberalization and constant development of the financial market.
1.2.4. Bases and principles for the transition to interest rate targeting
- Bases for Central Banks: (i) Interest rates are more and more directly and
effectively linked to the economy; (ii) Central Banks function to manage commercial banks
and influence the interbank lending interest rates; (iii) Notices related to operation of
monetary policy often emphasize interest rates rather than monetary supply; (iv) It is
common for Central Banks to immediately raise the target short-term interest rate when
predicting a higher inflation rate than the target inflation rate, and vice versa.
- Principles for transition: required 8 principles, including two key requirements as
follow: (i) Central Banks should persevere with the goal of price stability; and (ii) To
enhance the Central Banks’ independence.
1.2.5. Conditions for transitions into interest rate targeting operation of monetary policy
 Macroeconomic, financial and monetary conditions
 Evolutional sophistication of the financial market
 Financial openness and liberalization
 Viewpoint on monetary policy operation
 Commercial scale
 Independence and transparency of Central Banks

12

CHAPTER 2. WORLD’S EXPERIENCES IN TRANSITION INTO INTEREST
RATE TARGETING OF MONETARY POLICY OPERATION AND LESSONS
FOR VIETNAM
2.1. World’s experiences in transition into interest rate targeting of monetary policy
This thesis delved into the transition process; interest rate operation mechanism;
determination of target interest rates; formulation of interest rate corridor model; selection
of monetary policy instruments and transmission mechanisms of target interest rates in so me
countries.
2.1.1. Federal Reserve-Fed
2.1.2. European Central Bank (ECB)
2.1.3. Bank Negara Malaysia (BNM)
2.1.4. Bank of Thailand (BOT)
2.1.5. Bangko Sentral ng Pilipinas (BSP)
In bottom line, interest rate targeting operation, as a replacement of monetary supplytargeting policy, in order to constrain inflation around the target level, has facilitated to
maintain low interest rates and restrict fluctuations within the interest rate corridor, thereby
promoting the economic growth, creating more jobs and stabilizing the financial system.
2.2. Lessons for Vietnam
2.2.1. Inflation targeting framework is appropriate to the reality and development requirements
There are two methods to announce on inflation targeting: (i) Setting up specific and
strict inflation targeting (applied by ECB, US, Japan, etc.); (ii) Setting up flexible inflation
targeting (Philippines, Thailand, etc.) In the long term, the State Bank should consider
developing a flexible inflation targeting framework that ensures a broad monetary policy
framework and realization of other targets, especially against the context of Vietnam’s
wide-ranging and in-depth economic structuring.
2.2.2. Establish a transparent and effective transmission mechanism for monetary policy.
2.2.3. Lessons to be drawn for transition from money supply-targeting to interest ratetargeting operation
- Target system and selection of monetary policy instruments
- Setting up target interest rates and interest rate corridors
2.2.4. Use of unconventional monetary policy in the context of financial crisis
2.3. Notes to take during transition to interest rate targeting

First, the width of interest rate corridor
Second, how to announce the Central Bank's base interest rate to reinforce the
monetary policy signals, orientate interbank interest rate and format interest rates.
Third, the dependence of interbank market on liquidity reserve instruments that
facilitate the Central Bank's execution of monetary policy. Central Bank’s cost factors
should be taken into account.
13


CHAPTER 3. RECENT PRACTICE OF MONETARY POLICY OPERATION AND
FEASIBILITY TO APPLY INTEREST RATE TARGETING IN VIETNAM
3.1. Monetary policy implementation by the State Bank from 2007 to present
3.1.1. Macroeconomic background
Since late 2007, Vietnam, under the influence of international commodity prices and
interest rates, has suffered hiking inflation. The global financial and economic recession
coupled with prolonged loose fiscal and monetary policies destabilized the macro economy,
which was proved by a high budget overspending, braked economic growth, double-digit
inflation, and piled up bad debts of credit institutions. The years from 2012 have seen some
efforts to regulate policies and ease off economic puzzles. Besides, signals of the world’s
economic recovery came into sight. The domestic economy then has robustly revived with
inflation constrained under the target level. Vietnam was elevated from rank "BB-" to "BB"
by rating agencies and bears a stable outlook; CDS index reflecting the risk level of
Vietnamese Government bond has plummeted.
The domestic economy, however, remains worthy of concern for some aspects such
as: (i) Instable economic structure and institution; (ii) Stagnation of capital, securities and
real estate markets; Vulnerability of the banking system; (iii) Risk of re-emerging inflation
due to impacts of other than monetary factors.
3.1.2. Current status of the State Bank’s monetary policy operation
 Targets of the State Bank’s monetary policy
 Use of monetary policy instruments

3.1.3. Evaluation of the State Bank’s monetary policy operation over the recent time
 Achievements
 Shortcomings and causes
3.2. Assessment of the feasibility of interest rate targeting in monetary governance of
Vietnam
3.2.1. Legal basis of interest rate targeting
- Law on the State Bank of Vietnam issued in 2010
- Development Strategy of Vietnam Banking Sector to 2025, with Orientations to 2030
as issued in attachment to the Prime Minister's Decision No. 112/2006 / QD-TTg dated May
24, 2006.
- Government’s Resolutions, the annual Directive 01 of State Bank on orientation for
M2 growth, credit, reduction of deposit and lending interest rates and commitment of
exchange rate adjustment.

14


3.2.2. Current status of interest rate operation
 State Bank’s regulatory interest rates
 Interbank market interest rates
 Interest rates applied by credit institutions to customers
 Evaluating the State Bank’s operation of the interest rate operation
3.2.3. Establishing an interest rate targeting transmission mechanism for monetary policy in
Vietnam
 Bases of the transmission mechanism
 Description of the interest rate-targeting transmission mechanism
Diagram 3.1 : Interest rate-targeting transmission mechanism for monetary policy
applied by the State Bank
PHASE 1

Monetary
market shortterm interest
rate

Policy interest
rate
Refinancing rate,
Rediscount rate

PHASE 2

Intermediate
GIAI ĐO ẠN 2targets

- M2; Credit growth;
- Financial market
medium & long-term
interest rates;
- Exchange rate

PHASE 3

Inflation;
Growth
Ultimate targets

Operational targets

Standing
Facilities

OMOs rate

Interest rate of reserve
requirement/Excess
reserves
Target interbank
interest rate

Source: Author

The transmission mechanism of monetary policy through the interest rate channel can
be dissected into three phases: (i) Phase 1 is the transmission within the financial (monetary)
domain from the base interest rate to money market rates. (ii) The second phase of the
transmission is the reaction of banks' deposit and lending rates (long-term interest rates)
against the fluctuations of money market interest rates; (iii) Phase 3 represents the
transmission from the financial domain to the entire economy (i.e. output and prices), which
will depend on the impacts of interest rates on consumption and investment.

15


3.2.4. Qualitative and quantitative analysis of interest rate-targeting transmission mechanism
for monetary policy in Vietnam
 Qualitative analysis
 Interest rate interoperation in Vietnam
(i) Period 2007-2010: Interbank interest rates experienced sharp fluctuations in the
same trend with OMO interest rates of the same maturity, while other State Bank's
regulatory interest rates (base rates and refinancing rate) had negligible impacts on
interbank market interest rates. For many times, interbank interest rates were higher than
OMO bid interest rate and credit institutions’ deposit and lending rates. However, interbank

interest rates and primary market interest rates shared quite consistent moves, while primary
market interest rates fluctuated in the same direction with a latency of over 2 months and are
higher than the interbank interest rates, and slower pace of increase / decrease.
(ii) Period 2011-2017: Interbank interest rates tended to decrease and stay low; the
linkage from the State Bank's regulatory interest rates, then the interbank interest rates to
primary market interest rates (OMO policy interest rate) Interbank interest rate Market
Interest rate remains obscure and instable over time.
Nonetheless, market interest rate movements in the recent years implied that interest
rates would take bigger and bigger role to dominate activities of the economy.
 Interest rate-targeting transmission mechanism for achievement of ultimate
targets
+ In the wake of its admission to WTO, especially since late 2008, Vietnam saw a
weaker correlation between monetary supply and interest rates in particular and market
liquidity, which limited the State Bank's ability to regulate the market.
+ Since the second half of 2011, in response to the unrest macroeconomy, soaring
inflation (in 2011: 18.13%), high interest rates, poor liquidity of credit institutions, the State
Bank had taken actions towards combination of both money supply and interest rate
channels.
+ From 2016 to 2018, against the context of low inflation, an economy on way to
revive, surplus payment balance yet high rate of public debt, volatile financial market and a
bulk of outstanding bad debt, State Bank continued its flexible operation of the monetary
policy by synchronously blending multiple monetary policy instruments, so as to properly
control intermediate targets of M2 and credit.
 Quantitative analysis
- Interest rate interoperation in Vietnam
To measure how well the interest rate channel of monetary policy worked in Vietnam,
this thesis used ordinary least squares (OLS) that allowed a measure of the inter-operation
16

from State Bank's base interest rate (OMO bid interest bid rates) to overnight and 3-months
interest rate - money market rate (MMR) (1); and eventually to the average 1-year VND
deposit and lending rates (2). The relations between interest rates is expressed by the
following equation:
(2)
generally implies that the “pass-through” effect is incomplete;
perfect “pass-through” effect (Coricelli et al, 2006).

= 1 signals a

Results: there existed an instant inter-operation from OMO interest rates to short-term
interest rates. The impacts on long-term business interest rates are positive and statistically
significant. This result is consistent with the theory basis and reality.
-

Interest rate-targeting transmission mechanism for achievement of ultimate targets
Vector Autoregresive (VAR) or VECM model was used as an analysis technique to

process data in this study. Stationerity test and Cointegration test were conducted, then
came Optimal lag determination, Impulse response function (IRF) and Variance
decomposition (VD).


Data description and verification steps

+ Description and Augmented Dickey Fuller Test (ADF): Data source for the study
were taken from Quarter I/2001 to Quarter IV/2017, totaling 64 observations.
+ Results of tests:
- Granger - Causality test: M2 and DLendingrate were the causes for Granger to
change macroeconomic variables of a real economic sector; at the same time, CPI affected

both DLGDP and DLendingrate. Thus, operation of monetary that combines M2 money
supply and market interest rate for period 2012 - 2016 targets seemed useful for
achievement of ultimate targets.
- Testing for cointegration using the Johansen method: found a cointegration
relationship among variables in the model. Therefore, the research would use an vector error
correction model (VECM) to estimate the long-term relationship between data series,
thereby working out an equation (ECM) that represents the impacts of factors on the real
GDP value.
 Model formulation and experimental results
 Short-term relation among variables under the VAR model
In order to analyze the transmission via interest rate channel, the endogenous IR interest
rate (t) will be added to the model.
Y(t) = [y(t) CPI(t) IR (t) M2(t)] (6)
Then the overall VAR model will be as follow:
Yt= c + ∑
17


Where, c is vector of the constant, θi is the matrix of lag coefficients and εt is vector
of the noise;
is vector of endogenous variables, CPI is the
overall inflation rate; M2 is the change percentage of the total means of payment;
Lendingrate is the average lending interest rate.
- Determination of the optimal lag: it worked out that the optimal lag of the model is 4.
- Verification of residuals: There was a correlation among residuals, so, in order for
measurement of the impacts of shocks, Cholesky's method was used.
VAR Residuals
M2 Residuals

DLENDINGRATE Residuals

8

1.0

6

0.5

4
2

0.0

0

-0.5

-2
-1.0

-4
-6

03

04

05

06

07

08

09

10

11

12

13

14

-1.5

15

03

04

05

06

07

CPI Residuals

08

09

10

11

12

13

14

15

12

13

14

15

DLGDP Residuals

2

.008

1

.004

0
.000
-1
-.004

-2
-3

03

04

05

06

07

08

09

10

11

12

13

14

15

-.008

03

04

05

06

07

08

09

10

11

Figure 3.2: Residuals of money supply, interest rate, inflation and growth
Source: Author's calculations based on Eview 10
- Results of push function: Results of the cumulative reaction function (Figure 3.3)
revealed that the increase in M2 triggered a rise of interest rate in 1 -2 quarters, then drop by
0.5-0.6% in the next 4-5 quarters; and bouncing back from late 6 th quarter onwards with a
decreasing pace for nearly 3 years thereafter.
Response to Cholesky One S.D. Innovations ± 2 S.E.
Response of DLENDINGRATE to M2

Response of CPI to M2
2

1.6
1.2

1

0.8
0.4

0

0.0
-0.4

-1
1

2

3

4

5

6

7

8

9

10

9

10

1

2

3

4

5

6

7

8

9

10

Response of DLGDP to M2
.003
.002
.001
.000
-.001
-.002
-.003
1

2

3

4

5

6

7

8

Figure 3.3: Reaction function of growth, inflation and interest rate against 1% change
in money supply
- It can be seen from Figure 3.4 that a positive shock of interest rates reduced the
growth rate with a fairly long lag of 2-3 quarters and reached the peak of impact at -0.01%
18


after 5-6 quarters. Still, it is shown that increased interest rates triggered inflation climbing
and peaking after 3 quarters at 1%; such high inflation lasted for a medium term. VAR
model did not imply a decrease of prices after increase of interest rate.
Response to Cholesky One S.D. Innovations ± 2 S.E.
Response of CPI to DLENDINGRATE

Response of DLGDP to DLENDINGRATE

1.2

.001

0.8
.000
0.4
-.001

0.0

-.002

-0.4
1

2

3

4

5

6

7

8

9

10

1

2

3

4

5

6

7

8

9

10

Figure 3.4: Reaction function of growth and inflation against 1% change of interest rate:
Source: Author's calculations based on Eview 10
- Results of variance decomposition: The results of variance decomposition, contrary to
economic theories, implied no major role of interest rate shocks in the fluctuation of growth
(only 6.87% after 10 quarters), yet a clearer decisive determinant of prices (15.38% after 10
quarters).
Variance Decomposition using Cholesky Factors
Variance Decomposition of M2

Variance Decomposition of DLENDINGRATE

100

100

80

80

60

60

40

40

20

20

0

1

2

3

4

5

M2
CPI

6

7

8

9

0

10

1

2

Variance Decomposition of CPI

80

80

60

60

40

40

20

20
2

3

4
M2
CPI

5

6

7

8

5

6

7

8

9

10

9

10

DLENDINGRATE
DLGDP

Variance Decomposition of DLGDP
100

1

4
M2
CPI

100

0

3

DLENDINGRATE
DLGDP

9

0

10

1

2

DLENDINGRATE
DLGDP

3

4

5

M2
CPI

6

7

8

DLENDINGRATE
DLGDP

Figure 3.5: Results of variable variance decomposition
Source: Author's calculations based on Eview 10

 Long-term relation among variables under VECM model
The specific regression equation will be as follows:
DLGDP = α - β1*CPI - β2* DLendingrate - β3 *M2 - β4*εt-1 + ut
VECM model results showed that in the long run there would be no causal relationship
between the money supply and economic growth, but there would be a positive correlation
between interest rates and inflation and an opposite correlation between interest rates and
growth. Any imbalance in such correlations of variables would be balanced off within 2
quarters.
19


When putting credit growth and nominal effective exchange rate (NEER) into the
regression vector model to analyze the transmission mechanism of the monetary policy, it
was shown that credit as an intermediate target, which had been already under the State
Bank’s administrative controls, had a relatively faster and stronger impact on economic
growth and inflation. Meanwhile, interest rates and exchange rates, which are two marketdriven channels of monetary policy transmission, brought about narrower effects.
It is implied by quantitative analysis that in the short term, Vietnam's practical
context is not really favorable for the transmission of monetary policy through the interest
rate channel. However, an analysis of long-term relations and assessment of interest rate
data current status pointed out a perfect effect of policy rates (OMO) on short-term
interbank market interest rates (overnight and 3 -month) and the influence of these shortterm interest rates on the deposit and lending rates of credit institutions. A negative
correlation between interest rates and economic growth and positive correlation between
inflation and economic growth in the short or long term were also seen.
3.3. Conclusions upon analysis of qualitative and quantitative models
3.3.1. Results of interest rate transmission mechanism in Vietnam
 For State Bank's regulatory rate
 For business interest rates of credit institutions
3.3.2 The limitations of interest rate transmission and reasons
- Vietnam's financial market size is narrower than that of regional countries. The
financial market structure remains inharmonious as the banking system is still the mainstay.

- Financial instruments are not diversified, which limits the participation of investors,
the scope for growth of market, hence a limited effectiveness of the interest rate channel in
the long term.
- The economic dollarization also limits the efficacy of the interest rate channel in
Vietnam.
- Despite its improvements, the monetary market remains under-developed and fails
to well allocate liquidity among credit institutions, while financial instruments are not
diversified.
- The health and efficiency of banks play an important role in transmitting the
regulatory interest rates to the deposit and lending rates, thereby influencing the consumers
and investors’ behavior.
- Banks' deposit and lending rates are not promptly responsive to the changes of State
Bank's monetary policy instruments or regulatory interest rates.
- The economy is pursuing a wide-ranging growth and heavy dependence on
investment capital. The loose fiscal policy has cooled off the efficacy of monetary policy in
inflation control, thus constraining the influence of the interest rate channel.
- Although State Bank's legal status has been elevated under the Law on the State
Bank of Vietnam in 2010, the State Bank's operation of monetary policy, interest rates and
exchange rates is not really independent.
20


CHAPTER 4. RECOMMENDATIONS AND SOLUTIONS FOR TRANSITION INTO
INTEREST RATE TARGETING OF MONETARY POLICY IN VIETNAM

4.1. Development Strategy of Vietnam Banking Sector to 2025, with Orientations to
2030
4.1.1. Domestic and foreign macroeconomic prospects affecting Vietnam's banking and
financial system
 Prospects of international economy.

 Prospect of domestic economy.
 Banking sector’s viewpoints on innovation, development and targets .
In consideration of the domestic and foreign macroeconomic situation, socio economic development objectives for the 2016-2020 period under Resolution of the XIIth
Party Congress and the National Assembly, Decision 986 / QD-TTg dated August 08, 2018
approving the Development Strategy of Vietnam Banking Sector to 2025, with Orientations
to 2030 of the Prime Minister, the banking sector focuses on the main objectives as follows:
(i) to make the State Bank a true modern central bank with a higher independent position, a
rational

organizational

model

and synchronous, effective and efficient operation

mechanism; (ii) to bring the system of credit institutions to higher development level equal
to four ASEAN leading countries, ensuring the comprehensive financial universalization.
4.1.2. State Bank's operation of monetary policy until 2025 with a vision to 2030.
In the coming time, State Bank's operation of monetary policy will focus on key
tasks mentioned in the Development Strategy of Vietnam Banking Sector to 2025, with
Orientations to 2030 issued in attachment to Decision 986 / QD –TTg dated August 08,
2018, particularly: (i) To complete a monetary policy framework that aims to control
inflation; (ii) To redirect the regulatory channel of mon etary policy from monetary
aggregates to interest rate targeting.
4.2. Recommendation for a transition to the interest rate targeting operation of
monetary policy in Vietnam.
4.2.1. Formulation of mechanism for interest rate-targeting operation of monetary policy
 Setting up and select target rates (policy rates)
Pursuant to the Law on the State Bank of Vietnam in 2010, the State Bank shall
announce "refinancing rates, base rates and other interest rates to operate the monetary

policy and prevent usury". Accordingly, the State Bank has issued regulatory interest rates
including: base rates, refinancing rates, rediscount rates, OMO bid interest rates of valuable
papers, overnight lending interest rates for interbank electronic payment.
21


In fact, the State Bank’s operation implies that the short-term interest rate target is the
overnight interbank market interest rates, which is appropriate to the market movements
and exchange rate expectations.
 Establishing a mechanism for interest rate-targeting operation of monetary policy
a. Building an interest rate corridor with “2 ceilings” and “1 floor’’
- For ceiling rate 1 (lower ceiling rate), take the OMO 7-day maturity bid interest rates
of valuable papers.
- For ceiling rate 2 (higher ceiling rate), take the interbank overnight lending rate.
- For the floor rate, set up and make use of deposit instruments of credit institutions
with an overnight term
- Width of the interest rate corridor: at first, the interest rate corridor may be quite
broad at around 300-400 per cent (as recommended by IMF) and gradually narrows down to
200-250 per cent, even lower than 150-200 per cent.
- The target overnight interest rate is placed at the middle of the corridor, between the
ceiling rate 1 and the floor rate
- Mechanism of operation: interbank market overnight interest rates are mediated and
constrained within the corridor and kept close to the target interbank overnight interest rate.
- The target interest rates and interest rate corridor will be announced by State Bank as
for the current central exchange rate and exchange rate amplitude, on periodic basis after
every Monetary Policy Council meeting.
b. For other interest rates of the State Bank, such as refinancing rates; VND deposit
interest rate of reserve requirement...
c. Interest rates applied by credit institutions to customers
4.2.2. Recommendations for operation mechanism in response to economic unrest or crisis

4.3. Solutions for transition to interest rate-targeting operation of monetary policy
4.3.1. Formulate and apply a flexible inflation targeting framework for monetary policy
4.3.2. Consolidate and complete the monetary policy target system
4.3.3. Reform and improve the efficiency of monetary policy instruments
4.3.4. Enhance the independence and accountability of the State Bank
4.3.5. Develop the monetary market as an effective transmission channel of monetary policy
4.3.6. Solutions to improve the State Bank's statistics, analysis, reporting and forecast
systems
4.3.7. Restrict “black credit” to minimize the negative impact on the interest rate
transmission mechanism
4.3.8. Complementary solutions

22