Income has a stronger impact on consumption than interest rates
The International Monetary Fund (IMF) on August 26 announced the Technical Assistance Report on improving macroeconomic analysis and forecasting capabilities in Vietnam. This is a 51-page technical report summarizing the project implemented in the period May 2023 - April 2026.
A noteworthy content is that the equations in the macroeconomic forecasting tool are adjusted to reflect the characteristics of the Vietnamese economy.
The report noted that these are relationships used for analysis and forecasting in the model. The coefficients are not entirely estimated by regression from historical data, but are also calibrated based on economic theory, economic characteristics and professional assessment.
For private consumption, the model considers the link between consumption growth and actual disposable income and real interest rates.
The adjustment results show that private consumption in Vietnam is more affected by income than real interest rates.
The IMF Technical Assistance Group assessed that this characteristic is consistent with the limited household borrowing for consumption and the weak transmission level of monetary policy through consumer credit.
However, the relationship with private investment is different. In the model, private investment reacts quite strongly to fluctuations in economic activity and financial conditions.
According to the report, this structure reflects the sensitivity of the capital formation process to short-term economic growth developments and lending rates.
The above results do not mean that interest rates are not important for consumption or that a change in interest rates will directly create a corresponding change for investment. These are relationships established within the framework of a model to serve the development of economic scenarios.
External demand plays a large role in exports
Another content mentioned is the factors affecting Vietnam's exports.
In the adjusted equation, exports are heavily influenced by the needs of trading partners, while the level of reaction to the real effective exchange rate (REER) is determined to be lower.
The technical support group explained that this is related to Vietnam's deep participation in the global value chain and that most production contracts are valued in foreign currencies. Therefore, exchange rate fluctuations in the short term have a more limited level of transmission to export prices.
On the import side, the model shows that import demand has a fairly close relationship with domestic economic activities. Part of the reason is that a large amount of imported goods from Vietnam is used as input for export production.
With inflation, the model uses many factors, including past inflation, inflation targets, production gaps and import prices in domestic currency.
The adjustment results show that inflation in Vietnam has a relatively large inertia and import prices are one of the factors that significantly affect the model. Import prices are taken into account of both price movements at trading partners and nominal exchange rate fluctuations.
The report also clearly states that the findings and recommendations in the document are the views and advice of the IMF technical assistance group and do not necessarily reflect the views of Vietnamese functional and management agencies. The technical assistance group participates in analyzing the impact of expected policies but does not make policy recommendations within the framework of this project.
