Budget deficits, money growth and inflation: empirical evidence from Vietnam

Abstract

Purpose – This paper aims to uncover the nexus between budget deficits, money growth and inflation in Vietnam in the period 1995–2012. Design/methodology/approach – The paper uses a structural vector auto-regressive model of five endogenous variables including inflation, real GDP growth, budget deficit growth, money growth and the interest rate. Findings – It is found that inflation rose in response to positive shocks to money growth and that budget deficits had no significant impact on money growth and therefore inflation. This empirical evidence supports the hypothesis that fiscal and monetary policies were relatively independent. Money growth significantly decreased in response to a positive shock to inflation; interest rates had no significant effect on inflation but considerably increased in response to positive inflation shocks. This implies that the monetary base was more effective than interest rates in fighting inflation. Originality/value – This paper sheds light into understanding the link between budget deficits, money growth and inflation in Vietnam during the high-inflation period 1995–2012. The finding supports the hypothesis that fiscal and monetary policies were relatively independent over the period.