Vietnam macroeconomic policies in 2013

Topic: Vietnam macroeconomic policies in 2013

TABLE OF CONTENT

I. Introduction 3

II. Implementation of macroeconomic policy in Vietnam in 2013 3

2.1 Selecting macroeconomic policies 3

2.2 Reason why choosing these two policies 4

2.3 Implementation 5

II. Criticism of the two policies 6

2.1. Positive effect this macroeconomic policy 6

2.2. Negative effect of two policies 8

III. Conclusion 9

REFERENCE 11

I. Introduction

Experiencing a deep pressure of inflation and macroeconomic instability for many years with the climax of more than 18% of inflation in 2011, Vietnamese Government has adopted both effective monetary policy and fiscal policy as the macroeconomics policies. It is suggested that inflation has negative impacts on a large number of real variables (IMF, 2000). Price dispersion due to inflation can cause business failures (Head and Kumar, 2005). Additionally, inflation might impede the market mechanism (Ragan, 1998).  The hardest issue raised was that Vietnamese consumers had to suffer from an increase in overall price of usual products, which affected much on their living standard. Facing this emergency, Vietnam macroeconomics policies in 2013 combined both expansionary monetary policy and tightened fiscal policy.

The assignment is written with the expectation of generating thorough understanding of macroeconomics policies as well as economy conditions of Vietnam for the time being. In order to view two policies critically, two main parts will be divided, including implementation of macroeconomics policies in 2013 and criticism about them. It is also essential to split each main part into small stages to be more detailed and easily understood.

II. Implementation of macroeconomic policy in Vietnam in 2013

2.1 Selecting macroeconomic policies

Under the Resolution No. 01 and 02/2013/NQ –CP of Vietnamese Government, in the period from 2013 to 2014, two macroeconomic policies continue to be undertaken, namely, the expansionary monetary policy and contractionary fiscal policy. Monetary policy is used in order to affect the money supply in the market while fiscal policy involves Government’s expenditure (Mankiw, 2011). In detail, expansionary monetary policy occurs when the Central Bank would like to increase money supply by purchasing bonds from public (Keith, 2006). To influence on Government’s expenditure, tightened fiscal policy is applied with the purpose of lowering this expenditure and prefer saving (Ramey and Shapiro, 1998). These two policies are illustrated by the IS-LM model (Fleming & Mundell, 1963).

2.2 Reason why choosing these two policies

It is critical to identify the reasons for Government to select macroeconomics policies as above instead of applying one of these scenarios: combination of expansionary (tightened) monetary policy and expansionary (tightened) fiscal policy or combination of contractionary monetary policy and expansionary fiscal policy.

Firstly, it is complicated to mix either both “easy” fiscal policy and “easy” monetary policy in the emergency of economics recession or “tight” fiscal and “tight” monetary policy in the case of high inflation and unemployment (Walton & Rockoff, 1980). Thus, even though Vietnam has experienced high inflation and unstable economy, Government could not apply the second method in order to solve the problems in an appropriate manner.

Secondly, the mix of expansionary fiscal policy and tight monetary policy is unhealthy when the economy must enjoy a recovery and stability (James, 1982). Therefore, Joseph (1983) had pointed out that the key to an improved economic situation must lie in an effective adjustment of expansionary monetary policy and tight fiscal policy.

In detail, from 2011 to the beginning of 2013, Vietnamese Government pursued the tight monetary policy and easy fiscal policy, which resulted in a sharp increase in interest rate. Governor Nguyen Van Binh informed that interest rate rose from 7% in 2010 to 13% in 2011. This movement put pressure on investment and development of businesses as well as consumption of residents and appreciation of domestic currency. However, contractionary monetary policy had decreased inflation significantly. The most important was that under this policy, economy of Vietnam became stagnant and production delayed accompanied by bankruptcy of many enterprises.