The long-run analysis of monetary policy transmission channels on inflation: a VECM approach

摘要

In case of small open economy, the conduct of monetary policy has faced obstacles to achieve primary goals of price stability, due to high vulnerability to external shocks and weak policy frameworks. Therefore, this paper aims to analyse the effectiveness of monetary policy transmission channels in restraining inflation in case of Vietnam for 2001-2015. The use of a Vector Error Correction Model yields evidence that credit growth is the key determinant of high inflation. Additionally, the results suggest the interest rate channel has a perverse effect on inflation in the long run, which means that the inflation rate increases with the policy rate. There is also significant short-run causal relationship from credit growth to inflation, and from the policy rate to inflation. However, empirical results fail to confirm the existence of relationship between the exchange rate channel and inflation in both short run and long run.