Welfare consequences of inconsistent monetary policy implementation in Vietnam

Figures & data

Figure 1. Vietnam CPI inflation: 1996Q1-2015Q4 (annualized quarter-to-quarter percent changes).

Source: GSO. The red lines are the average of inflation in different periods.

Table 1. Monetary policy targets and performance in the period 2000-2015.

		2000	2001	2002	2003	2004	2005	2006	2007
Inflation	Target	6	< 5	3-4	< 5	< 5	< 6.5	< 8	< 8
	Perform	−1.7	-.04	3.8	3.2	7.8	8.3	7.4	8.3
Output	Target	5.5-6	7.5-8	7-7.3	7-7.5	7.5-8	8.5	8	8.2-8.5
	Perform	6.8	6.89	7.08	7.34	7.79	8.44	8.23	8.46
		2008	2009	2010	2011	2012	2013	2014	2015
Inflation	Target	$<10$	< 15	7-8	$<7$	$<10$	8	7	5
	Perform	23.1	7.1	8.9	18.7	9.1	6.59	4.09	0.63
Output	Target	8.5-9	5	6.5
	Perform	6.31	5.32	6.78

Source: Author’s computation from the data of State Bank of Vietnam (SBV), and Annual Report of SBV.

Table 2. Fixed parameters.

Parameter	Description	Value	Target
$\overline{\pi }$	Steady-state inflation	${1.02}^{0.25}$	Two percent infl.steady state
β	Discount factor	0.99	Standard value
$\upsilon$	Inverse Frisch elasticity of labor supply	3.00	Standard value
γ	Consumption habit	0.80	Standard value
θ	Elasticity of substitution	10.0	Standard value
χ	Degree of Indexation	0.00	Cogley & Sbordone,(2008)
μ	Weight on lagged inflation	1.00	Cogley & Sbordone,(2008)
G / Y	Government expenditure share	0.22	Sample Mean

Source: Author’s calculation and collection from previous papers.

Table 3. SMM estimates.

Parameter	Description	Estimated Value	S.e.
ρR	Monetary shock persistence	0.8102*	0.0004
ρZ	Technology shock persistence	0.7999*	0.0005
${\rho }_{\overline{\pi }}$	Shock to trend inflation persistence	0.9949*	0.0000
$100{\sigma }_R$	Monetary shock volatility	0.0024*	0.0063
$100{\sigma }_Z$	Technology shock volatility	0.0099*	0.0024
$100{\sigma }_{\overline{\pi }}$	Shock to trend inflation volatility	0.0007 *	0.0022
${\varphi }_{\pi }$	Taylor coefficient on the inflation gap	2.4234*	0.0003
${\varphi }_y$	Taylor coefficient on the output gap	0.5000*	0.0001

Note: S.E. is a standard error. The superscripts * denote that for the null hypothesis the true parameter value is zero and rejected at the 5 percent significance levels.

Source: Authors’ calculation.

Figure 2. Dynamic responses to a monetary shock. Source: Authors’ calculation.

Figure 3. Dynamic responses to a shifting trend inflation shock. Source: Authors’ calculation.

Figure 4. Welfare costs of constant positive trend inflation. Source: Authors’ calculation.

Table 4. Welfare costs of constant trend inflation.

	${\overline{\pi }}^{*}=0\%$	${\overline{\pi }}^{*}=6\%$
Welfare Cost		3.14%
Welfare	−212.81	−219.22
Ud	−211.06	−212.11
Ul	−0.25	−4.94
Uv	−1.50	−2.16
Steady-state C	0.82	0.81
Steady-state H	1.04	1.05
E(C)(*)	−0.0019	−0.0386
E(H)(*)	0.0001	0.0017
$100{\sigma }_C$	1.69	2.01
$100{\sigma }_H$	1.54	1.94

Note: (*) expressed as percentage deviation from the deterministic steady state. U_d, U_l and U_v are the deterministic steady-state, level and volatility components, respectively.

Source: Authors’ calculation.

Figure 5. The cost of price dispersion. Source: Authors’ calculation.

Figure 6. Determinacy region and trend inflation.

Note: The determinacy region is expressed by the red area.

Source: Authors’ calculation.

Table 5. Welfare costs of shifting trend inflation.

	${\sigma }_{\overline{\pi }}=0$	${\sigma }_{\overline{\pi }}>0\%$
Welfare Cost		0.13%
Welfare	−212.79	−213.05
Ud	−221.15	−211.15
Ul	−0.21	−0.45
Uv	−1.43	−1.45
Steady-state C	0.82	0.82
Steady-state H	1.05	1.05
E(C)(*)	−0.0016	−0.0036
E(H)(*)	0.0001	0.0001
$100{\sigma }_C$	1.65	1.66
$100{\sigma }_H$	1.63	1.63

Note: (*) expressed as percentage deviation from the deterministic steady state. U_d, U_l and U_v are the deterministic steady-state, level and volatility component, respectively.

Source: Authors’ calculation.

Table 6. Welfare costs of constant and shifting trend inflation: Rotemberg model.

	Constant Trend Inflation		Shifting Trend Inflation
	${\overline{\pi }}^{*}=0\%$	${\overline{\pi }}^{*}=6\%$	${\sigma }_{\overline{\pi }}=0$	${\sigma }_{\overline{\pi }}>0$
Welfare Cost		0.40%		0.08%
Welfare	−211.21	−212.02	−212.76	−212.92
Ud	−211.06	−211.74	−211.14	−211.14
Ul	−0.15	−0.16	−0.17	−0.32
Uv	−0.0001	−0.1220	−1.45	−1.46
Steady-state C	0.82	0.81	0.82	0.82
Steady-state H	1.04	1.05	1.05	1.05
E(C)(*)	−0.0012	−0.0012	−0.0014	−0.0026
E(H)(*)	0.0001	0.0001	−0.00001	−0.00001
$100{\sigma }_C$	0.01	0.08	1.66	1.67
$100{\sigma }_H$	0.70	0.71	1.69	1.69

Note: (*) expressed as percentage deviation from the deterministic steady state. U_d, U_l and U_v are the deterministic steady-state, level and volatility component, respectively.

Source: Authors’ calculation.

Table 7. SMM estimates.

Parameter	Description	Calibration
η	Probability of not being able to optimize	0.7400
ρR	Monetary shock persistence	0.8500
ρZ	Technology shock persistence	0.9300
${\rho }_{\overline{\pi }}$	Shock to trend inflation persistence	0.9950
$100{\sigma }_R$	Monetary shock volatility	0.0025
$100{\sigma }_Z$	Technology shock volatility	0.0110
$100{\sigma }_{\overline{\pi }}$	Shock to trend inflation volatility	0.0008
${\varphi }_{\pi }$	Taylor coefficient on the inflation gap	2.2000
${\varphi }_y$	Taylor coefficient on the output gap	0.4000

Source: Authors’ calculation.

Table 8. Moments.

	σY	σC	σH	$\rho (Y,C)$
Data	0.006	0.020	0.014	0.86
Calibration	0.006	0.010	0.015	0.80

Note: moments in the first row are obtained from HP-filtered Vietnamese data (2005-2016) while the second row is the moments from simulations for the calibrated model.

Source: Authors’ calculation.

Table 9. Welfare cost of constant and shifting trend inflation: An alternative parameter set.

	Constant Trend Inflation		Shifting Trend Inflation
	${\overline{\pi }}^{*}=0\%$	${\overline{\pi }}^{*}=4\%$	${\sigma }_{\overline{\pi }}=0$	${\sigma }_{\overline{\pi }}>0$
Welfare Cost		6.80%		0.59%
Welfare	−213.94	−228.16	−214.66	−215.88
Ud	−211.06	−211.75	−211.25	−211.25
Ul	−0.69	−11.67	−1.04	−2.12
Uv	−2.18	−4.73	−2.37	−2.50
Steady-state C	0.82	0.81	0.82	0.82
Steady-state H	1.04	1.05	1.05	1.05
E(C)(*)	−0.005	−0.090	−0.0081	−0.0165
E(H)(*)	0.0003	0.0053	0.004	0.009
$100{\sigma }_C$	2.03	2.99	2.11	2.18
$100{\sigma }_H$	1.77	2.24	1.96	1.96

Note: (*) expressed as percentage deviation from the deterministic steady state. U_d, U_l and U_v are the deterministic steady-state, level and volatility component, respectively.

Source: Authors’ calculation.

Table 10. Moments.

	σY	σC	σH	$\rho (Y,C)$
Data	0.006	0.020	0.014	0.86
Calibration	0.009	0.010	0.013	0.85

Note: moments in the first row are obtained from the HP-filtered Vietnamese data (2005-2016) while the second row is the moments from simulations for the calibrated model.

Source: Authors’ calculation.

Table 12. Calibration: model with staggered price and wage contracts.

Parameter	Description	Calibrated Value
β	Discount factor	0.99
γ	Consumption habit	0.83
ω	Labor supply disutility	1.00
$\upsilon$	Inverse Frisch elasticity of labor supply	1.00
$1-{\overline{g}}^{-1}$	Steady state share of Government expenditure	0.26
ρZ	AR(1) coefficient for technology shock	0.8
ρg	AR(1) coefficient for government spending shock	0.98
$100{\sigma }_Z$	Standard deviation of technology shock	1.10
$100{\sigma }_g$	Standard deviation of government spending shock	0.55
Monetary Policy
${\varphi }_{\pi }$	Taylor coefficient on the inflation gap	2.70
${\varphi }_y$	Taylor coefficient on the output gap	0.10
ρR	AR(1) coefficient for monetary shock	0.81
$100{\sigma }_R$	Standard deviation of monetary shock	0.25
Calvo Price Setting
θp	Price elasticity	10.0
ηp	Probability of not being able to optimize	0.74
χp	Degree of price indexation	0.50
μp	Weight on lagged inflation	0.50
Calvo Wage Setting
θw	Wage elasticity	10.0
ηw	Probability of not being able to optimize	0.74
χw	Degree of wage indexation	0.50
μw	Weight on lagged inflation	0.50
Shifting Trend Inflation
${\overline{\pi }}^{*}$	Steady-state level of trend inflation	${1.02}^{0.25}$
${\rho }_{\overline{\pi }}$	Persistence level of shocks to trend inflation	$0.995$
$100{\sigma }_{\overline{\pi }}$	Standard deviation of shocks to trend inflation	0.08

Source: Authors’ calculation.

Table 11. Welfare cost of constant and shifting trend inflation.

	Welfare Cost(%)
	Constant	Shifting
General Case (${\eta }_p>0,{\eta }_w>0$)	2.73	0.25
Case 1 (${\eta }_p>0,{\eta }_w=0$)	0.28	0.06
Case 2 (${\eta }_p=0,{\eta }_w>0$)	2.17	0.16

Source: Authors’ calculation.

Cogley, T., & Sbordone, A. M. (2008). Trend inflation, indexation, and inflation persistence in the new keynesian phillips curve. American Economic Review, 98(5), 2101–2126. doi:10.1257/aer.98.5.2101

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