U.S. FED Monetary Policy Normalization and Implications for Vietnam

The world was closely watching the Fed’s Federal Open Market Committee (FOMC) meeting on December 15th-16th, 2015. The Fed is expected to increase the fed fund target rate over the next several years until it reaches a normal rate for a healthy economy. This nominalization of the interest rate in the U.S. will have consequences for a large number of emerging economies, including Vietnam.

The Vietnam Initiative’s experts have drafted a policy brief that addresses the change of the interest rate. The author group consists of Le Hong Giang (TGM Australia), Nguyen Dieu Huong (IMF), Phung Duc Tung (MDRI), Andreas Hauskrecht (Indiana University), Dinh Truong Hinh (Johns Hopkins University), and Tran Ngoc Anh (Indiana University). On December 31st, 2015, the Development Strategy Institute (Ministry of Planning and Investment), in collaboration with Mekong Development Research Institute, organized a seminar to present the policy brief and to consult participants. The seminar was chaired by Mr. Cao Viet Sinh, Senior Counselor, Minister’s Advisor. Participants included the standing section of the editorial group of socio-political reports, a group of advisors to the Prime Minister, the Ministry of Planning and Investment, the Ministry of Finance, the Ministry of Industry and Trade, and the State Bank of Vietnam. There were three parts to this interactive seminar: Monetary Policy, Economic Reforms, and Introduction of the Vietnam Initiative.


To start the seminar, Nguyen Dieu Huong presented how economies that have impacts on and/or have similar socio-economic characteristics to the Vietnamese economy responded to the US interest rate increase.


Next, Le Hong Giang made a number of observations about markets associated with the interest rate of the US and China.

Tran Ngoc Anh indicated four channels through which the US interest rate may have effects on Vietnam’s exchange rates and proposed two policy options related to the interest rate for Vietnam: (i) raise the interest on the VND to maintain the current exchange rate, and (ii) keep the current interest and let the VND depreciate. Then he came up with five policy recommendations for the government, including: (i) Vietnam can manage the exchange rates only if the economy achieves equilibrium exchange rates, or has abundant foreign exchange reserves, or receives financial support from the IMF/other countries; (ii) the government can identify the optimal equilibrium exchange rates through a rigorous cost-benefit analysis; (iii) policy flexibility is necessary, based on a blend of employing econometric models and cost-benefit analyses and watching the economic policies of the U.S., China, and other countries closely; (iv) policy intervention should be aimed at obtaining the equilibrium exchange rates and the market must be well-informed about the government’s determination to maintain the equilibrium; (v) when the economy is stabilized, deposits in US dollar should be banned to mitigate dollarization, and the government should make efforts to cut the budget deficit, reducing loans and increasing foreign reserves to achieve macroeconomic stabilization.


In the following section, Tran Ngoc Anh discussed proposals concerning economic reform to stabilize the economy in the long run. He placed an emphasis on how to take advantage of the TPP by upgrading global value chains through know-how flows. Three specific initiatives designed to promote know-how flows were: (i) appointing officials based on economic performance, (ii) leasing foreign governments land, and (iii) reforming policies aimed at multinational companies and industries.

In addition to the presentations of the three abovementioned economists, other participants posed a variety of questions and contributed different opinions to discussions on a wide range of macroeconomic issues, such as: whether a ban on US dollar deposits in Vietnam would be effective in eliminating dollarization when there are already too many regulations in the economy; if inflation targets should be set; how international remittances influence macroeconomic stabilization; the relationship between inflation and growth in the case of Vietnam; and if the depreciation of the VND could help improve the balance of trade when Vietnam relies heavily on imported inputs for production.


In conclusion, the seminar created favourable conditions for participants to discuss ideas about designing and implementing policies aimed at fostering the economy, and left unanswered questions as well. It is expected that cooperation between Vietnam Initiative and domestic researchers to undertake economic research will be strongly promoted in order to address problems faced by the economy in both the short term and long term.