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Inflation in Vietnam(from 1995 to 2014)Tutor : Le Thu TrangGroup 5: Nguyen Thi Duyen Nguyen Thi Thuy Linh Ta Thi Kieu Oanh Nguyen Minh TuyenClass: 4TC-13

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ContentsPolicies to deal with inflation in VietnamThe effects to Vietnams economyThe causes of Inflation Inflation overview

2I. Inflation overview1. Definition:Inlfation: An increase in the overall level of prices in the economy

I. Inflation overview2. MeasurementMeasurementGDP deflatorConsumer Price IndexCPI

I. Inflation overview

I. Inflation overview

I. Inflation overviewSevere economic crisisEconomic downturnHyperinflationChronic InflationEconomic growth stimulationCreeping Inflation1-4%/year10%/year 1000%/year

I. Inflation overview3. Inflation in Vietnam

II. The causes of Inflation

Cost-push.Increasing cost of the factors of production In Vietnam: large pool of underemployment in agriculture sector -> the price of labor extremely cheap (unskilled labor)

II. The causes of Inflation

2. Demand-pull Excess demand for goods and services Vietnam has too little suitable high technology factories and labors.

III. The effects to Vietnams economy

Positive impact

Negative impact

III. The effects to Vietnams economyPositive impact Inflation is likely a lubricant in the Vietnam economymore money circulatingmore liquid2. No Deflation deflations harmfulness

III. The effects to Vietnams economyNegative impact: The higher inflation rate, the more serious the problem it is The poor are impacted immediately To rein in the money supply raise interest rates hurt stocks

4.Monetary Policy

Definition: - Conducted by the central bank - Management of money supply and interest rate Objectives :

Include: - Direct tools: * Credit control * Interest rate control - Indirect tools: * Discount rate * Open market operation * Reserve requirement

4. Monetary Policy Reserve requirement The amount of money to be deposit at the central bank by credit institutions Money multiplier M=1/R

MS M RR R R M MS I In Viet Nam: RR applied in 1991 Initial, reserve ratio was 10%

Indirect tools

4. Monetary Policy2. Discount rate : Interest rate that the central bank makes to commercial bank Used to prevent the financial panics

Discount rate Encourage bank from borrowing Money supply Interest rate In Vietnam, initially, SBV just made short-term loans based on credit contractIndirect tools

4. Monetary Policy3.Open market operation:

The operations of purchase and sale of short-term valuable paper Open market purchase for MS Open market sale for MSThis tool is used most often by SBV Easy and quick to conduct Flexible and precise Not need change law or bank regulationIndirect tools

IV. Monetary policyiDirect tools Credit toolUse credit limit to control the amount of credit of commercial bank in the permit amountInterest rate toolIf inflation rate is highInterest ratell risePeople tend to savingMoney demand reducesA fall in inflation

4. Monetary PolicyThe relationship between monetary policy and inflation

4. Monetary Policy1995-20002006-20102001-20052011- NowThe application of monetary policy in Vietnam Tight monetary policy liberalization of interest rate In 1999, interest rate reduced to 0.1% To encourage the economic growth: RR from 7% to 5% On July 12, 2000, OMO has operated formally

4. Monetary policy 2001-2005 From 2001,using loose monetary policy, interest tool,credit tool to reduce deflation In 2004, Inflation to 9.5% suddently OMO used as a primarily toolIn 2005 , interest rate 3 timesThe application of monetary policy in Vietnam

4.Monetary policy2006-2010 In 2007 ,SBV changed from buying to mainly selling G bond In 2009, tight monetary policy but flexibility in operation : Discount rate from 13% to 9%, RR from 11% to 6%The application of monetary policy in Vietnam

4. Monetary policy2010 to nowThe application of monetary policy in Vietnam Tight monetary policy to control inflationInterest rate ceiling from 14%(2011) to 5.5%(2015) In 2014 ,inflation rate was acceptable (4.09%)

4. Monetary policy CommentsCombine and apply a lot of monetary policy together

Set to many objectives in each period. Some objectives is not realistic

The management structure still is weak

So the effect of monetary policy is still unclear

The application of monetary policy in Vietnam

Thank You !

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