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PAPER (1)

Monetary Policy and Asset Returns in Vietnam (under review)

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This paper assesses the significance of the asset price channel of monetary policy in Vietnam. We estimate a New Keynesian (DSGE) model using Bayesian techniques and successfully match the relevant empirical results with a large-scale factor-augmented vector autoregression model (FAVAR). We find robust empirical evidence of a significant asset price channel of monetary policy in Vietnam: impulse responses of stock returns to monetary policy shocks (both positive and negative) are significant and consistent with standard macroeconomic theory. This is the first study in literature to provide empirical evidence of the impact of adverse and expansionary monetary policy shocks on different sectors of the Hanoi and Ho Chi Minh Stock exchanges by relying on an FAVAR model. More importantly, the results derived here highlight the relative importance of incorporating a rich-data environment in identifying monetary policy shocks. Here, we demonstrate that the FAVAR model provides consistent and more meaningful impulse responses in contrast to the widely used small-scale recursive VARs.

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PAPER (2)

Inflation Targeting for Vietnam (under review) (under review)

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Taylor’s (1993) rule provides a standard for implementing inflation targeting. However, the latter rule does not directly address open-economy concerns such as exchange rate volatility. Excessive fluctuations in the exchange rate can be a major problem for a small-open economy whose central bank’s priorities lie not only in keeping inflation stable but also in minimizing excessive fluctuations in dollar reserves. Therefore, for Vietnam, which is a country that is highly vulnerable to exchange rate volatility and terms of trade shocks, this paper illustrates the point that optimal inflation targeting would require a central bank to take additional measures such as responding systematically to transitory import price shocks, including making needed corrections to the exchange rate. Consequently, this paper derives a backward-looking interest rate rule that embodies the case of a managed-float and examines it stabilizing properties in contrast to a standard Taylor’s (1993) rule and the historical monetary policy of the central bank of Vietnam (SBV). For the benchmark rule derived here, the key estimated monetary response parameters are calibrated via vector autoregression (VAR). The theoretical simulations suggest that the benchmark rule is largely superior to the historical monetary policy rule. However, when compared to a Taylor’s (1993) rule, the benchmark rule is mostly preferable when preferences for foreign exchange reserves and low interest rate volatility equally supersede concerns for inflation volatility.

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PAPER (3)

Commodity Price Uncertainty and Bank Lending: Evidence from Leading Cocoa Exporters (under review)

Most studies prioritize the mean-effect of commodity prices (first-moment shocks) in explaining financial developments in developing countries. Contrastingly here, this manuscript highlights the equal importance of the uncertainty-effect of commodity prices (second-moment shocks) in shaping financial conditions in developing countries. Using the top cocoa-exporting countries as a case study, this paper illustrates a new bank lending channel through which the uncertainty vis-à-vis the spread in international cocoa prices leads to a severe contraction in commercial loans supply in Brazil, Cameroon, Colombia, Côte d’Ivoire, Dominican Republic, Ecuador, Ghana, Indonesia, Mexico, Nigeria, Peru, and Uganda; hence the “beguiling coincidence”. The magnitude of the empirical results found here amplify the necessity for policymakers in the top cocoa-exporting countries to consider this new bank lending channel as an important source of lending frictions when assessing and designing macro-prudential polices aimed to mitigate banking crises in their respective countries.

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PAPER (4)

Concentration Risk and Housing Booms

Prior to the global financial crisis of 2007-2008, the US banking sector experienced an unprecedented increase in asset concentration, triggered by rapid accumulation of mortgage-related securities and residential loans, which eventually exposed the entire financial system to insolvency risks when the housing bubble burst in November 2007. Understanding the relative importance of asset concentration risk in explaining the latest global financial crisis, this study introduces a monthly aggregate index of concentration risk for banks and conducts a stress test to examine the specific role of housing price booms in fueling systemic risk behavior in the banking sector. Using a structural vector autoregression model with exogenous variables and a long-run identification scheme, this study finds that house price booms contribute to an increase in aggregate concentration risk in the US banking sector.