The transmission mechanism of monetary policy in Vietnam: A VAR approach

Abstract

This paper analyses monetary transmission mechanism in Vietnam by using a Vector Autoregression (VAR), focusing especially on how the economy dynamically responds money demand, interest rate, exchange rate, and asset price shocks. In this paper, we establish identification conditions to uncover the dynamic effects of monetary policy shocks. By using quarterly data over the period 1995-2010, a VAR model is developed to analyze various channels of monetary policy mechanism in a country with a large open and small economy like Vietnam. The empirical results show money demand and interest rates account for a major part of variations in output. And output is affected by monetary tightening in some lags, bottoming out after 5-6 quarters.

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