Interest rate pass-through and exogenous factors: Evidence from Vietnam

This article examines the efficiency of the monetary policy transmission mechanism in Vietnam by investigating a two-stage linkage between policy rates and retail bank rates in consideration of exogenous drivers including the asymmetric pass-through behaviour and the State Bank of Vietnam's significant change on the operational target. The month-end dataset, and asymmetric error correction model, autoregressive distributed lag regression and vector autoregressive regression are utilized to measure the degree of ultimate pass-through, adjustment speed, and short-run pass-through of the two-stage interest rate pass-through process. Our results indicate quick responses in market rates to changes in policy rates; and incomplete long-run pass-through coupled with delayed impact and slow adjustment from market rates to retail rates; while the responses appear to be symmetric with respect to the direction of change of rates. Moreover, the positive impact of the State Bank's regime shift on the effectiveness of the interest rate transmission is another important finding of this study. These findings eventually lead to some suggestions on the possible measures to enhance the effectiveness of monetary policy transmission.