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  • 1. PART 2: Monetary Policy Chapters 12:250-252, 256-259 & 17:373-374
  • 2. State Bank of Vietnam
  • 3. State Bank of Vietnam
      • The State Bank of Vietnam defines its principal roles as :
      • Promoting monetary stability and formulating monetary policy.
      • Promoting institutions’ stability and supervising financial institutions.
      • Providing banking facilities and recommending economics policies to the government.
  • 4. Contd…
      • Providing banking facilities for the financial institutions.
      • Managing the country’s international reserves.
      • Printing and issuing banknotes.
      • Supervising all commercial banks’ activities in Vietnam. Lending state money to the commercial banks.
      • Issuing government bonds, organising bond auctions.
      • Being in charge of other roles in monetary management and foreign exchange rates.
  • 5. Monetary Policy
    • “ Central banks in most developed economies usually describe their aims in terms of the pursuit of non-inflationary growth.
    • Today, there’s a consensus that price stability should be the overriding objective of monetary policy.
    • External Balance Goal: Maintain the exchange rate within a particular band.
    • Internal Balance Goal: Maintain the inflation rate within a particular band.
  • 6. External Balance
    • When there is an increase in the demand for the Dong; the market exchange rate strengthens and the exchange rate moves to the lower end of the established band, the Authority sells VND to banks.
    • The money base (supply) will increase, pushing down Vietnamese dollar interest rates. Lower domestic interest rates relative to foreign interest rates restrain capital inflows into the nation (encouraging outflows).
    • Supply of foreign currency decreases, weakening the currency to restore stability.
  • 7. External Balance r M s0 M D M 0 r 0 M p AD 0 Y 0 p 0 RGDP AS D FX0 Quantity Exchange rate e 0 S AUD0
  • 8. External Balance
    • When there is a decrease in the demand for the Dong and the currency weakens; the exchange rate moves to the upper end of the established band, the Authority purchases VND from banks.
    • The money base (supply) will decrease, pushing up Vietnamese dollar interest rates. Higher domestic interest rates relative to foreign interest rates induce capital inflows into the nation.
    • Supply of foreign currency increases, strengthening the currency and restoring stability.
  • 9. External Balance r M 0 M s0 M D r 0 M p Y 0 p 0 RGDP AS AD 0 Quantity Exchange rate S AUD0 e 0 D FX0
  • 10. Inflation
    • Inflation is more about value of money than value of goods. Ice cream is the same but when you pay more money becomes less valuable.
    • Inflation in an economy is a wide phenomenon that concerns with the value of currency in the economy.
  • 11. Internal Balance
    • Sale and purchase of government securities changes bank reserves and thus their ability to extend credit, thus changing the money supply and the interest rate.
    • The Monetary Authority targets interest rates by affecting system liquidity.
    • Monetary policy influences the size of bank reserves. This influences:
      • The size of the money supply.
      • The interest rate and the availability of credit.
      • Investment spending, interest-sensitive consumption spending thus output, employment and the price level.
  • 12. Open Market Operations
    • Monetary Authority actions designed to change interest rates by changing system liquidity to change the cost of credit and thus economic activity and the price level.
  • 13. Open Market Operations
    • Easy Money: Authority announces its decision to reduce interest rates – it buys government securities to maintain the lower interest rates; expanding the money supply and reducing the cost of credit. (Purchases)
    • Tight Money: Authority announces its decision to increase interest rates – it sells government securities to maintain the higher interest rates; reducing the money supply and increasing the cost of credit. (Sale)
  • 14. Internal Balance – Contractionary Policy A policy aimed at increasing interest rates and to restrict AD D AUD0 Quantity Exchange rate S AUD e 0 Q 0 r M 0 M s0 M D r 1 r 0 M p Y 0 p 0 RGDP AS AD 0
  • 15. Internal Balance – Expansionary Policy Policy aimed at reducing interest rates and raising the level of AD. Quantity Exchange rate e 0 Q 0 D AUD0 r M s0 M D M 0 r 0 M p AD 0 Y 0 p 0 RGDP AS S AUD0
  • 16. Monetary Policy Effectiveness
    • Responsiveness of capital flows, consumption and investment to changes to changes in interest rates.
    • Phase of the business cycle.
    • Private decisions of lenders and borrowers.
    • Size of the expenditure multiplier.
  • 17. Application Question 11 Suppose you are the monetary policy adviser for the government. The economy is experiencing a large and prolonged inflationary trend. What change in open market operations would you recommend?
  • 18. Revision 9
    • Are the following true or false ? Explain.
    • If the monetary authority increases the money supply, subsequent portfolio adjustment will reduce interest rates, which in turn will increase investment expenditure.
    • The buying and selling of government securities in the open market by the monetary authority is a major cause of changes in the money supply.
    • The monetary authorities can influence the money supply or the rate of interest but they cannot set the two independently.
    Questions for Review: Problems and Applications: Chapter 12: 4-5, 7 Chapter 12: 8, 10 Chapter 17: 1, 4-5
  • 19. Review
  • 20.
    • RMIT, 2009,Lecture Slides, BB.
    • Image ref: http://dollardaze.org/blog/posts/2007/May/31/1/FRN.jpg
    References