Luận văn thạc sĩ UEH impact of monetary policy on bank’s loan supply, bank’s balance sheet approach

UNIVERSITY OF ECONOMICS INSTITUTE OF SOCIAL STUDIES

HO CHI MINH CITY THE HAGUE

VIETNAM THE NETHERLANDS

VIETNAM – NETHERLANDS

PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS

IMPACT OF MONETARY POLICY ON THE SUPPLY OF

BANK LOAN: BANK’S BALANCE SHEET APPROACH

BY

Ms. NGUYEN NHU Y

MASTER OF ARTS IN DEVELOPMENT ECONOMICS

HO CHI MINH CITY, DECEMBER 2013

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UNIVERSITY OF ECONOMICS INSTITUTE OF SOCIAL STUDIES

HO CHI MINH CITY THE HAGUE

VIETNAM THE NETHERLANDS

VIETNAM – NETHERLANDS

PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS

IMPACT OF MONETARY POLICY ON THE SUPPLY OF

BANK LOAN: BANK’S BALANCE SHEET APPROACH

The thesis submitted in partial fulfillment of the requirements for the degree of

MASTER OF ARTS IN DEVELOPMENT ECONOMICS

By

Ms. NGUYEN NHU Y

Academic Supervisor:

DR. NGUYEN HOANG BAO

HO CHI MINH, DECEMBER 2013

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ACKNOWLEDGEMENT

There are a number of people without whom this thesis might not have written, and to

whom I am greatly indebted.

Firstly, I would like to express the deepest appreciation to my family, without their

encouragement and support, I would not have a chance to be finished the thesis.

Secondly, I would like to express my sincere thanks to my supervisor, Dr. Nguyen

Hoang Bao, for the patient guidance, encouragements, comments, and advices he has

provided throughout the thesis process.

Thirdly, I would like to express my sincere thanks to Dr. Truong Dang Thuy for the

econometric guidance and advices.

Fourthly, I am very grateful to all lecturers of the Vietnam-Netherlands Programme for

giving me knowledge and guidance to fulfill the thesis. Besides, I would like to thank

all the academic and technical support from the staffs of Vietnam – Netherlands

Programme during the course.

Finally, I would like to thank my friends and people, who have any help and

support for my thesis but are not above-mentioned.

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ABSTRACT

This study researches the impact of monetary policy onthe supply of bank loan in

Vietnam during the period from 2008 to 2012. The impact is examined by using the

Generalized Methods of Moments (GMM) approach. The estimation results indicate

that monetary policy change has negative impact on the supply of bank loan and the

magnitude is different among banks. Bank characteristics i.e. asset size, liquidity, and

capitalization depress the negative impact of monetary policy change on the supply of

bank loan. The purpose of this study is to hope policy maker take into consideration

when using monetary policy to regulate the supply of bank loan in the context that

different bank react and absorb the monetary transmission differently.

Key words: Monetary policy, supply of bank loan, bank characteristics, GMM,

Vietnam.

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LIST OF FIGURES

Figure 2.1: The bank – lending channel mechanism...............................................................23

Figure 4.1: Analytical framework. .........................................................................................50

Figure 5.1: The correlation among dependent variable and independent variables..................55

Figure 5.2: The correlation among independent variables and cross-term variables................56

Figure A.1: Overview of the transmission mechanism (Égert & MacDonald, 2006)...............92

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LIST OF TABLES

Table 3.1: The short-term three months interbank deposit offer rate from 2008 to 2012.........34

Table 4.1: Variables definition and sources............................................................................36

Table 4.2: Expected signs of variables in equation (21). ........................................................44

Table 5.1: Summary statistics of the variables used in the regressions. ..................................54

Table 5.2: The empirical regression results of GMM estimation. ...........................................59

Table A.1: The base rate of VND in the year 2008.................................................................74

Table A.2: The base rate of VND in the year 2009.................................................................75

Table A.3: The base rate of VND in the year 2010.................................................................76

Table A.4: The required reserve rate of VND in the year 2008. .............................................77

Table A.5: The required reserve rate of VND in the year 2009. .............................................77

Table A.6: The required reserve rate of VND in the year 2010. .............................................78

Table A.7: The required reserve rate of VND in the year 2011. .............................................78

Table A.8: List of commercial banks. ....................................................................................79

Table A.9: Correlation matrix................................................................................................81

Table A.10: The empirical regression results of GMM estimation. ........................................85

Table A. 11: Wooldridge test for autocorrelation in panel data. .............................................87

Table A. 12 : White’s test for Heteroskedasticity in panel data. .............................................87

Table A. 13 : Test the relevance of instrument varible. ..........................................................87

Table A.14: Summary of empirical literature reviews. ...........................................................88

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TABLE OF CONTENTS

CHAPTER 1: INTRODUCTION ........................................................................................... 9

1.1 Problem statement.................................................................................................... 9

1.2 Research objective ..................................................................................................11

1.3 Research questions..................................................................................................12

1.4 Research methodology ............................................................................................12

1.5 Structure of thesis....................................................................................................13

CHAPTER 2: LITERATURE REVIEW................................................................................14

2.1 Theoretical literature ...............................................................................................14

2.2 Empirical studies.....................................................................................................24

CHAPTER 3: STYLIZED FACT ON VIETNAMESE MONETARY POLICY AND

BANKING SYSTEM............................................................................................................28

3.1 Monetary policy system ..........................................................................................28

3.1.1 Legal framework .................................................................................................28

3.1.2 Monetary policy strategy .....................................................................................29

3.1.3 Monetary policy instrument .................................................................................30

3.2 Monetary policy and the supply of bank loan change in the period 2008 – 2012......31

CHAPTER 4: METHODOLOGY, MODEL SPECIFICATION AND DATA RESOURCES 36

4.1 Data and econometric model ...................................................................................36

4.1.1 Data and variables ...............................................................................................36

4.1.2 Econometric model..............................................................................................40

4.2 Analytical framework..............................................................................................50

CHAPTER 5: FINDINGS .....................................................................................................53

5.1 Descriptive and comparative data analysis...............................................................53

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5.1.1 General picture of data for variables of empirical model ......................................53

5.1.2 General relationship among variables...................................................................55

5.1.3 Data analysis discussion ......................................................................................58

5.2 Econometric results.................................................................................................59

CHAPTER 6: CONCLUSION ..............................................................................................66

6.1 Summarize of methodology.....................................................................................66

6.2 Summarize of major findings ..................................................................................66

6.3 Policy implications..................................................................................................68

6.4 Shortcomings of the study .......................................................................................69

6.5 Suggestions for further study...................................................................................69

REFERENCES......................................................................................................................70

APPENDIX...........................................................................................................................74

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CHAPTER 1: INTRODUCTION

This chapter begins the thesis research by introducing the research topic and states the

research problems in terms of social and scientific point of view. This chapter also

includes research objective which is what the paper intends to study and states the

research questions. The next part is research methodology, which presents briefly the

method will be used in the paper to solve the research objectives and obtains the

answers for research questions. The final part of this chapter presents the organization

of the thesis.

1.1 Problem statement

Banking system plays a significant role in economic development process in Vietnam.

Banks are considered the capital transmission channel of the economy and its activity

covers all economic and social activities. Banks are financial intermediaries between

savers and borrowers. It provides capital for the economy and bridges the companies

with market. Therefore, it will be an effective tool for government to regulate the

economy. The government manages the macro-economy by implementing monetary

policy, fiscal policy, foreign capital control policy, and trade policy. Among the above

policies, the study focuses on the monetary policy and its effect on banking system.

Banking system leads the market through credit operations and payments between

commercial banks in the system following the government regulation. Thereby, the

banking system expands the volume of money supply in circulation by supplying credit

to sectors in the economy and controls them effectively. One of the most important

functions of banking system is financial intermediary. For the economy, this function

has an important role in promoting the economic growth by satisfying capital needs for

the continuity of production process and production expansion. With this function, the

bank makes inactive capital into active capital, stimulates the circulation of the

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