Currently, Vietnam’s economy has deeply integrated with the world economy. We have officially joined the World Trade Organization (WTO) in 2006, signed a Bilateral Agreement with the United States in 2001, joined the Free Trade Agreement (ASEAN), the Pacific Economic Forum (APEC). ), founder of the Asia-Europe Cooperation Forum (ASEM). Therefore, Vietnam’s economy is greatly influenced by the world economy and the region.
Viewing: What is monetary policy
In order for the national economy to develop stably, it requires flexible management of the Government, with tools to regulate the macro-economy stably, in which one of the most important tools is monetary policy. Monetary policy and the banking system are as important to the economy as the blood vessel system of a living organism, especially for a market economy that has been deeply integrated into the world economy. gender. The conduct of monetary policy by the state bank to achieve the purposes of economic stability and growth – such as controlling inflation, maintaining a stable exchange rate, achieving full employment or growth economy.
Vietnam’s economy in the period from 2005 to now has been affected by the world economy. Therefore, the Government must use the tools of macroeconomic policies in general and monetary policy in particular to manage the economy in order to control inflation, stabilize market prices, and ensure development. sustainable and stable.
Monetary policy is the process of managing and supporting money by the government or central bank to achieve special purposes such as controlling inflation, maintaining stable exchange rates, achieving full employment or economic growth. Monetary policy involves changing certain interest rates, either directly or indirectly through the open market, setting required reserve levels, or exchanging in the foreign exchange market.
Monetary policy has a very important role in regulating the volume of money circulating in the entire economy. Through monetary policy, the Central Bank can control the monetary system, thereby curbing and repelling inflation, stabilizing the purchasing power of money and promoting economic growth. On the other hand, monetary policy is also a tool to control the entire system of commercial banks and credit institutions.
The expansionary or contractionary monetary policy has a direct effect on the effective use of social resources, the scale of production and business and thereby affects the unemployment rate of the economy. In order to have a falling unemployment rate, an increasing inflation rate must be accepted. That situation puts the Central Bank on the responsibility to use its tools to contribute to the expansion of investment, production and business, and at the same time to actively participate in the continuous and stable growth. The unemployment rate should not exceed the natural increase in unemployment.
Economic growth is the first and most important goal of monetary policy. Economic growth is driven by two factors: interest rates and general demand. The increase or decrease in the monetary volume has a strong impact on interest rates and general demand, thereby affecting the increase in production investment and finally on gross national output. the growth of the economy. Therefore, monetary policy must aim at economic growth through the appropriate increase or decrease in monetary volume.
Price stability is important in microeconomics and macroeconomics. Price stability helps the State plan the direction of economic development more effectively because it eliminates price fluctuations. Price stability helps to create a stable investment environment, contributing to attracting investment capital, exploiting all social resources, promoting businesses and individuals to produce and bring benefits to themselves as well as to society. .
Stable interest rate
A desire for interest rate stability because fluctuations in interest rates make the economy uncertain and difficult to plan for the future. Therefore, stabilizing interest rates is the implementation of credit interest rates to provide means of payment for the national economy through banking credit operations, based on loan funds created from money sources. Deposits of the society and with a flexible interest rate system must be flexible and suitable to the movement of the market mechanism.
Stabilize financial markets
The stabilization of financial markets is a very important goal in the management of the economy of each government, financial market stability is also promoted by the stability of interest rates because fluctuations in interest rates can affect the economy. can cause instability in financial institutions. In recent years, sharp fluctuations in interest rates have been a particularly serious problem for the already struggling savings and loan associations as we know them.
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Stabilizing foreign markets repent
Foreign exchange market is a market in which currencies of different countries are exchanged for each other, it is in this market that the exchange rate is determined. The stable exchange rate not only has a positive effect because a part of the USD invested capital can be transferred to the stock market to “wave” but it also has great significance for strengthening the confidence of investors. foreign investor. Exchange rate policy is always an important macro factor for foreign investors to consider when they intend to invest in Vietnam. The fluctuations of the exchange rate will affect the purchasing power of the currency, thereby affecting more or less the activity of the economy depending on the degree of extroversion of that economy.
Basic contents and tools for implementing monetary policy
The most important content of monetary policy is the money supply for the economy. The money supply can be through the credit route, it can also be through the operation of the open market (buying and selling valuable papers), the foreign exchange market (buying and selling foreign currencies) and to regulate the level of money supply. In response, central banks of different countries use different tools such as interest rates, interest rates, reserve requirements, etc. Therefore, it is obvious that monetary policy affects the economy, because it was born to regulate money, but the movement of money in the economy is like blood circulating in the body. human body.
Is a form of credit granting by the central bank to commercial banks. When granting a credit to a commercial bank, the central bank increased the money supply and created a basis for commercial banks to create currency and clear their solvency.
Required reserve ratio tool
It is a central bank regulation of the cash-to-deposit ratio that commercial banks are required to comply with to ensure liquidity. Commercial banks can hold cash above or equal to the required reserve ratio but are not allowed to hold cash less than this ratio.
Open Market Operations Tools
Is the central bank’s activity of buying and selling short-term valuable papers in the money market, regulating supply and demand for valuable papers, affecting the reserve volume of commercial banks, thereby affecting affects the credit supply capacity of commercial banks, leading to an increase or decrease in the amount of money.
Credit interest rate tool
It is an indirect tool in the implementation of monetary policy because changes in interest rates do not directly increase or decrease the amount of money in circulation, but can stimulate or inhibit production. The interest rate management mechanism is understood as a set of specific policies and solutions of the Central Bank in order to regulate interest rates in the money and credit markets in a given period.
Credit line tool
Is a direct administrative intervention tool of the Central Bank to control the increase in credit volume of credit institutions. Credit limit is the maximum outstanding balance that the Central Bank forces commercial banks to comply with when granting credit to the economy.
The exchange rate is the relative purchasing power of the domestic currency and the foreign currency. It both reflects the purchasing power of the local currency, as well as the relationship between supply and demand for foreign exchange. The exchange rate is a tool, a lever to regulate the supply and demand of foreign currencies, strongly affecting exports and domestic production and business activities. The exchange rate policy sensitively affects the production, import and export of goods, financial status, currency, international balance of payments, investment attraction, and reserves of the country. In essence, the exchange rate is not a tool of monetary policy because the exchange rate does not change the amount of currency in circulation. However, in many countries, especially countries with economies in transition, exchange rates are considered an important support tool for monetary policy.
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From the above content, it can be seen that monetary policy in particular is one of the most important tools of the state to manage and administer the economy. Monetary policy contributes to stabilizing the macro economy, controlling inflation, stabilizing the prices of consumer goods, stabilizing the foreign exchange market, gold market, etc. creating advantages in international links and division of labor, adapting to the trend of economic globalization.