tailieunhanh - A multinomial logit model and the direction of monetary policy in Vietnam

This empirical study is an attempt to fill this gap by estimating the MLM to investigate the relationship between several regressor variables (namely the output gap, inflation gap, exchange rate and the ratio of trade balance over nominal GDP) and the directional change of interest rates in Vietnam. | South East Asia Journal of Contemporary Business, Economics and Law, Vol. 7, Issue 3 (Aug.) ISSN 2289-1560 2015 A MULTINOMIAL LOGIT MODEL AND THE DIRECTION OF MONETARY POLICY IN VIETNAM Nguyen Thi Huong Lien VNU, University of Economics and Business E4, 144 Xuan Thuy, Hanoi, Vietnam Email: liennth@ ABSTRACT Using both monthly and quarterly data of Vietnam over the period 2000-2008, this study attempted to investigate the effects of several regressor variables (namely the output gap, inflation gap, exchange rate and the ratio of trade balance over nominal GDP) on the choice of the State Bank of Vietnam between discrete alternatives (., to raise, to cut or to keep interest rates unchanged). The logit estimation results clearly show the relationship between the output gap and inflation gap and the directional change of interest rates while the other two regressor variables including exchange rate and ratio of trade balance over nominal GDP could not explain the fluctuation of interest rates in Vietnam. These estimation results have been verified by comparing with the official statements of the Government, the State Bank of Vietnam and other monetary authority. Key words: Multinomial Logit Model, Interest Rates, Monetary Policy. Introduction Monetary policy is referred to as either an expansionary policy or a contractionary policy. Traditionally an expansionary policy will be conducted to combat unemployment in a recession by lowering the interest rate. On the contrary, a contractionary policy will raise the interest rate to curb inflation. From another point of view, monetary policy is classified as to be accommodative, if the interest rate set by the central monetary authority is intended to stimulate economic growth; neutral, if it is intended neither to stimulate growth nor curb inflation; or tight if it is intended to reduce inflation. Thus, through raising, lowering or merely keeping the interest rate unchanged, the central bank can attain .