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MINISTRY OF EDUCATION AND TRAINING STATE BANK OF VIETNAM
BANKING UNIVERSITY HO CHI MINH CITY
NGUYEN THI KIM PHUNG
THE IMPACT OF FOREIGN RESERVES ACCUMULATION ON INFLATION
AND STERILIZATION OF THE STATE BANK OF VIET NAM
SUMMARY OF PHD THESIS
Major : Finance - Banking Code : 9.34.02.01
Candidate : NGUYEN THI KIM PHUNG Course: 20
Scientific Supervisors: Ass. Prof HOANG THI THANH HANG
Ass. Prof VO XUAN VINH
HO CHI MINH CITY – 2018
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CHAPTER 1
INTRODUCTION OF THE RESEARCH
1.1. Background and Statement of the Research
Financial globalization and the expansion of international capital flows have
benefited nations. But these also increase the risk of financial crisis. Developing countries
have accumulated a considerable amount of foreign reserves to deal with a series of financial
crises in the world. In addition to the role of financial stability, foreign reserves can have
direct or indirect impact on the macroeconomic through various aspects (Drummond et al,
2009; Hviding et al, 2004; etc.). However, the foreign reserves accumulation increases the
base money and the expansion of money supply if central bank doesn’t sterilize conducive
to inflation. Sterilization occurs when the central bank performs simultaneous transactions
on foreign assets and domestic assets to neutralize the effects of foreign exchange market
intervention on domestic money supply.
In the trend of international economic integration, in recent years, foreign reserves of
Vietnam have increased, and the tendency of accumulation foreign reserves in Vietnam is
necessary next time. Vietnam is in the process of deep integration in finance and other fields,
changes in macroeconomic policies and economic environment continue to cause difficulties
and challenge for policy managers. Clear understanding of the spread effects of
accumulating foreign reserves on inflation as well as sterilization contribute significantly to
the policy management of the State Bank of Vietnam (SBV), help to the success and
sustainability of the economy.
The above information are the practical meanings of the research. In theory, the thesis
is studied on the basis of exploring the gaps that previous studies is not mention.
There are many papers analyzing relationship between foreign reserve accumulation
and inflation for different countries and group of countries, such as Heller (1979), Khan
(1979), Lin &Wang (2005), Elhiraika & Ndikumana (2007), Steiner (2009), Borivoje &
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Tina (2015), Chaudhry et al (2011), Chen & Huang (2012), Zhou et al (2013), Pham Thi
Tuyet Trinh (2015), etc. However, no papers have investigated the characteristics of each
country's economy, which characterizes the Vietnamese economy as a dollarized economy.
Therefore, this study focuses on assessing the impact of accumulating reserves on inflation
in a dollarized economy.
In terms of sterilization, there have been some studies on the effectiveness of central
bank intervention in some countries, mainly in emerging markets such as Latin America
countries (Aizenman & Glick, 2009; Ljubaj et al, 2010) and Asian countries (Glick &
Hutchison, 2009; Ouyang et al, 2010 ; Wang, 2010 ; He et al,2005; Takagi & Esaka, 2001;
Cavoli & Rajan, 2006). In Vietnam, there are studies by Pham Thi Tuyet Trinh and Nguyen
Thi Hong Vinh (2011), Pham Thi Hoang Anh and Bui Duy Phu (2013), Dang Van Dan
(2015) with the results show that the SBV's sterilization has not been effective in the past.
However, in the above studies, no studies have evaluated the sterilization’s effectiveness in
the context of dollarized economies. The thesis will focus on the sterilization’s effectiveness
of the SBV in the context of a dollarized economy. In addition, during the study period, the
global financial crisis occurs in 2007 and 2008, so the thesis also considers whether the
global financial crisis has an impact on the effectiveness of the SBV's sterilization.
From the practical and theoretical point of view, the topic "The impact of foreign reserves
accumulation on inflation and sterilization of the State Bank of Vietnam" has been
chosen.
1.2. Objectives of the study
1.2.1. General objective of the study
The dissertation examines the influence of foreign reserves accumulation on inflation
and sterilization of the SBV to ensure the stabilization of monetary policy for social and
economic development.
1.2.2. Specific objectives of the study
From the general objective, the thesis aims to achieve the following specific objectives:
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First, assessing the current status of foreing exchange reserves, dollarization and
tools of the sterilization in Vietnam.
Second,evaluating the short-term and long-term effects of accumulating foreign
reserves on inflation in Vietnam in the context of a dollarized economy.
Third, examining the effectiveness of the neutral intervention of the SBV in the
context of a dollarized economy and studying the impact of the two factors : dollarization
and global financial crisis on the sterilization’s effectiveness of the SBV.
Finally, exploring the experience of sterilization in some countries around the world
to provide experience lessons for Vietnam.
1.3. Research questions
From the above specific objectives, the research questions are as follows:
+ How is the current status of foreing exchange reserves, dollarization and tools of the
sterilization in Vietnam ?
+ How does accumulation of foreign reserves in short-term and long-term impact on
inflation in Vietnam in the context of dollarized economy?
+ How is the sterilization’s effectiveness of the SBV in the context of the dollarized
economy
+ Do dollarization and the global financial crisis change the level of SBV sterilization’s
effectiveness?
+ How is the experience of sterilization in terms of tools, effectiveness, sustainability and
financial costs in some countries around the world and what are lessons for Vietnam?
1.4. Research subjects and scopes of the study
- The research subjects are the effect of accumulation of foreign reserves on inflation and
the sterilization of the SBV.
- The scopes of the study:
+Space: The thesis examines the impact of foreign exchange reserves on inflation and
sterilization in Vietnam.
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+Time: Thesis studies in Vietnam from the first quarter of 2004 to the second quarter of
2017
1.5. Research methodology
The thesis uses quantitative research method (ARDL Bound Test Model and 2SLS
Estimation) in combination with synthesis, analysis, comparison and case study.
1.6. Contributions of the thesis
The dissertation provides a comprehensive theoretical basis for the mechanism of
impact of accumulating foreign exchange reserve effects on inflation and sterilization. The
thesis first time examines these issues in the context of a dollarized economy. Moreover, the
study first time analysis in deep whether dollarization and global financial crisis change the
sterilization’s effectiveness in Vietnam.
The dissertation proposes some policy recommendations and experience lessons for
the SBV to neutralize unwanted effects on the economy as the SBV accumulates foreign
exchange reserves.
1.7. Structure of the thesis
The dissertation consists of five chapters:
Chapter 1: Introduction of the research
Chapter 2: Theoretical background and empirical evidence on the impact of foreign
reserves accumulation on inflation and sterilization of the central bank.
Chapter 3: Research methodology and data.
Chapter 4: Research Results and Discussion
Chapter 5: Conclusions and policy implications
