1
MINISTRY OF EDUCATION AND TRAINING
UNIVERSITY OF ECONOMICS HO CHI MINH CITY

Đinh Thi Thu Hong
TRILEMMA AND MACRO ECONOMIC POLICY CHOICE IN VIETNAM
Major: Finance  Banking
Code : 62340201
SUMMARY OF DOCTORAL THESIS
Supervisor: Prof. Dr. Tran Ngoc Tho
Ho Chi Minh City  2014
2
Introduction
1. Necessity of the thesis
The impossible trinity theory states that a country simultaneously may
choose at most two of the following three goals: monetary independence,
exchange rare stability and fully financial integration. In the context of
financial integration steadily increasing in most countries, the choices and
tradeoffs between policy objectives become more and more important,
because a combined policy will bring different effects for the economy.
Therefore, the identification of the policy effectiveness will be very
important for government agencies and macro administration to develop
and implement appropriate policies in order to achieve certain economic
goals. Thus, I selected research topic “Trilemma and macroeconomic
policy choice in Vietnam” for my doctorate thesis.
2. Prior researches
Many both domestic and foreign researches has exploited the impossible
trinity theory issues in many different aspects such as the measurement
methods of policy objective acheivement, impact of combined policies on
to macroeconomic variables. However, studies on the impact of policies
generally focused on inflation and output growth, not on unemployment
rate (as Aizenman et al. 2008, 2010, 2011); or researches on Vietnam (such
as some articles of Pham Thi Tuyet Trinh (2010), Le Phan Thi Dieu Thao
(2010), Nguyen Tran Thuc Anh (2010), Nguyen Dai Lai (2013) …) mainly
interpreted the the trilemma situation, have not analyzed the role of the
policy combination on the economy, and not quantify the impacts, so
obviously not much policy contribution provided. Differently, this thesis
aimed at calculating the three index of trilemma for ten developing
countries in Asia, especially Vietnam. The impacts of the policy
combination on output growth, inflation and unemployment variables were
also studied in this thesis. The empirical results of the thesis may imply
some useful policy recommendations for the government of Vietnam.
3
3. Objectives of the thesis
Objectives of the thesis are expressed through the following research
questions:
 How were the macroeconomic policy choices of Vietnam and nine
other Asian countries from the perspective of the economic
“trilemma” hypothesis, from 2000 to 2012?
 Do the policy choices of countries in the sample have to be
constrained by the impossible trinity theory or not?
 How did the policy choices and the foreign reserves affect output
growth volatility, the volatility of inflation, and unemployment rate,
with focus on the countries in sample?
 Do the level of financial development and the government
expenditure affect the relationship between policies and economic
stability or not?
4. Data
The sample of the thesis consisted of 10 Asian countries because of the
limitations of the data for the case of Vietnam while econometric models
often require a relatively large number observations.The sample
constructed on the basis of similarities among countries for drawing
common as well as particular implications for Vietnam. The observation
period was from 2000 to 2012.
5. Methodology
In this thesis, I applied the methodology of Aizenman et al. (2008), Ito and
Kawai (2012) to calculate the de factor trilemma indexes for Asean
countries in the sample. The research models were mainly based on
Aizenman et al. (2010). However, my study differed from them by testing
the impact of policy choices on unemployment rate, along with output
growth and inflation variables. In addition, I also examined the role of two
moderator variables  financial development level and government
4
expenditure  on policy combinations. Different estimation methods with
panel data (on Stata 11 sofware) were applied in the thesis appropriately.
6. The thesis contributions
Different from previous studies on the same subject, the thesis has some
new contributions:
 Based on new measures of Aizenman, Chinn and Ito (2008), Ito and
Kawai (2012), the thesis estimated the trilemma indexes: monetary
independence (MI), exchange rate stability (ER) and financial openness
(FO) for Vietnam and nine other Asian countries for the period of 2000 2012. The de factor measurements were suitable for testing the trilemma
tradeoffs. And this study finds that the policy choices in the ten countries in
the sample were still binding as Mundell – Flemming Theory.
 In order to examine the policy choices for open economies including
Vietnam and nine other Asian countries, I used a sample similar to some of
other prior studies but the research purpose is different. The thesis aimed at
analyzing the impact of policy choice to macroeconomic performance (i.e
output and inflation volatility, average of output, average of inflation, and
average of unemployment rate) which has not ever been implemented
before.
 This is the first study investigating how each or any pair combination
of the three policy choices affect the average of unemployment rate and
significant results for Vietnam individually as well as the whole sample
were achieved. The thesis is also the first one to fully calculate the
threshold of international reserve (IR) holding to achieve specific
economic goals for policy selection in practice.
 The regression results of some control variables also contributed many
notable findings, such as the impact of trade openness, TOT shock on
output volatility, the impact of 2008 financial crisis on unemployment rate,
and the role of external financing.
 Not only examining the interaction between the trilemma choices and
financial development, and their influences on the economic stability, but
the thesis also finds that government expenditure affects the link between
trilemma policy configurations and output volatility, inflation volatility.
5
 Based on empirical findings of the trilemma theory together with
Vietnam's economic situation, some policy choices are recommended for
Vietnam in order to maximize the benefits and to reduce risk from
financial integration, to stabilize and grow the economy.
7. Structure of the thesis
Chapter 1: Theoretical framework and empirical evidence
Chapter 2: Data and Methodology
Chapter 3: Empirical results and discussion
Chapter 4: Policy reccommendation for Vietnam
Chapter 1
Theoretical framework and empirical evidence
1.1. From IS – LM to MundellFleming model:
1.1.1. Effectiveness of fiscal and monetary policy under fixed exchange
rate
The Mundell–Fleming model, was also known as the ISLMBP model,
describing effectiveness of fiscal and monetary policy under fixed
exchange rate. Accordingly, under the fixed exchange rate regime and free
capital flows, fiscal policy is highly effective while the monetary policy is
ineffective.
1.1.2. Effectiveness of fiscal and monetary policy under floating exchange
rate
In a floating exchange rate regime and free capital flows, the monetary
policy has a greater effect while fiscal policy has little effect.
1.2. The impossible trinity theory
6
The impossible trinity theory states that a country simultaneously may
choose at most two of the following three goals: monetary policy
independence, exchange rare stability and fully financial integration.
1.3. The extensive studies of impossible trinity theory
1.3.1. Development of the trilemma dimensions and the diamond patterns
Foreign reserves is considered as the fourth peak in triangular illustrating
the impossible trinity theory. The earlier literatures focused on the role of
international reserves as a buffer stock for exchange rate stability while
maintaining pretty high level of monetary policy independece and financial
liberalization.
1.3.2. The methodology for the construction of “trilemma indexes”
Monetaty policy independence
Exchange rate stability
Financial market openness
1.3.3. The role of international reserves
Foreign exchange reserves plays an important role in helping countries
achieve higher levels of the trilemma policies. In other words, international
reserves can mitigate the policy tradeoff of trilemma policies. It also plays
an important role in protecting financial markets from capital flows
reversal and keeping the exchange rate in the target band.
1.3.4. Trilemma configurations of countries in sample
Many erlier studies analyzing the policy choices in the countries and
regions through different periods confirmed that impossible trinity theory
had become an important indication for policy makers. The value of the
theory remains unabated even when many countries had to reconsider and
change their policy choices after the crisises, or in current unstable
economic and political conditions.
7
1.3.5. The relationship between policy choices and macroeconomic
variables
Monetary policy, exchang rate regime and financial liberalization policy
are always important tools with that, a government could achieve its
growth and economic stability objectives. Many empirical studies have
examimed the effects of policy choices on the macroeconomic variables.
In order to add in to prior researches’ contribution, and to provide
empirical evidences for the case of Vietnam and other nine Asian
countries, the thesis especially analyzed the impacts of combined policies
to unemployment (along with output growth and inflation variable). In
addition, I calculated the de factor “trilemma indexes” and tested the
validity of a linear specification of these indexes to examine whether the
notion of the trilemma can be considered to be a tradeoff and binding.
Chapter 2
Data and methodology
The sample of this thesis included ten Asean countries with some
comparable characteristics1. They are China, Hong Kong, India, Indonesia,
Korea, Malaysia, Phillipines, Singapore, Thailand and Vietnam in the
period of 2000 – 2012. Hong Kong, Korea and Singapore are high income
countries, – as defined by the World Bank. The data set is primarily from
the World Bank and IMF sources, and processed by three years rolling
window.
2.1. Regression on panel data
2.1.1. The basic estimations
Pool regression model
Fixed effect model
Random effect model
1
The choice of countries in the sample was similar to Patnaik, et al. (2011), Patnaik and Shah (2010), except for
Taiwan because of lack of data.
8
Test for appropriate model
After selecting the most appropriate model from three basic models, the
thesis tested hypotheses about the phenomenon of heterokedasticity and
autocorrelation.
Test for heterokedasticity and autocorrelation
Because the phenomenon of heterokedasticity and autocorrelation
simultaneously existed in the model, the thesis used FGLS regression on
panel data to fix them.
2.1.2. FGLS regression
2.1.3. Regression with dummy variables
2.2. Data and methodology
2.2.1. Examining the linear relationship between the three trilemma
indexes
Linear regression model:
1 = β1MIi,t + β2ERi,t + β3FOi,t + t
(2.1)
where: MI is the monetary independence index, ER is the exchange rate
stability index, FO is the financial integration index; i refers to countries
and t represents the time index.
2.2.2. Examining the impact of policy choices to the macroeconomic
variables
Basic model:
Yit = α0 + α1ITit + α2IRit + α3(ITit x IRit) + α4FCi + EFitB + XitГ + Ziф + ɛit (2.2)
where:
Yit: vector of dependent variables, is the measure of macro policy
performance for country i in year t.
ITit (Impossible Trinity): a vector of any two of the three trilemma indexes,
namely MI, ER, and FO.
9
IRit (International Reserve): the level of international reserves (excluding
gold) as a ratio to GDP.
ITit x IRit : an interaction term between the trilemma indexes and the level
of international reserves.
FCi (Financial Crisis): a dummy for financial crisis.
EFit (External Financing): vector of external financing sources to country i
in year t.
Xit : a vector of macroeconomic control variables (relative income, trade
openness, TOT shock… ).
Zt : a vector of global shocks.
ɛit : error term.
i : country index
t : time index (yearly, from 2000 to 2012)
2.2.3. Description of variables
Dependent variables
Independent variables
Other control variables
Table 2.1: Expectation of correlations in the model
Order
Number
Variables
01
MI
02
ER
03
FO
04
Reserve (IR)
05
Crisis
06
FDI
07
FPI
08
Others capital
09
Shortterm debt
Output
growth
volatility
Average
output
growth
Inflation
volatility
Average
Inflation
Average
unemployment
rate
+
+/+
+
+
+/+
+
+/+/+
+/+/+
+
+
+
+
+
+
+
+/+
+
+
+
+
+/+/+
+
+/+/
10
10
TDS
11
Relative income
12
Trade openness
13
TOT shock
14
Fiscal policy
15
Volatility of M2
16
Private credit
17
Average of inflation
18
Inflation Volatility
19
US rate
20
World ouputgap
21
Oil shock
+
+/+/+
+/+/+/

+
+/+

+
+/+/+
+
+
+/+/+/+
+/
+
+/+/
+
+
+
+/+
2.2.4. Analysis procedure
The thesis began with calculating MI, ER, FO indices, based on methods
of Aizenman, et al. (2008), Ito and Kawai (2012).
After that, I estimated the linear regression (model 2.1) to test whether the
three trilemma policy goals were linearly correlated, and confirmed the
notion that a rise in one trilemma variable should be tradedoff with a drop
of a linear weighted sum of the other two.
Next, I examine how the policy choices among the three trilemma policies
(monetary independence, exchange rate stability, financial integration)
affected output growth volatility, average of output growth, volatility of
inflation, average of inflation, and average of unemployment, based on
regression model 2.2. For each dependent variable, I considered three
models of combined policies2. Each model was estimated with both the
full sample of ten Asean countries and a subgroup of seven developing
countries (exclude three high income countries: Korea, Hong Kong and
Singapore). In order to test the different effects in the case of Vietnam, I
used the Vietnam dummy variable (VN) in models with full sample, and
compared the results.
2
Model 1: combination of MI and ER; Model 2: combination of MI and FO; Model 3: combination of ER and
FO.
11
2.2.5. The method of calculating the impossible trinity indexes:
Monetary policy independent index (MI)
Exchange rate stability index (ER)
Financial integration index (FO)
2.3. Descriptive analysis
2.3.1. The policy choices of Asean countries in the sample:
The degree of monetary policy independence (MI) of countries in the
sample
Figure 2.2 illustrates the degree of monetary policy independence (MI) of
countries in the sample
The degree of exchange rate stability (ER) of countries in the sample
Figure 2.5 illustrates the degree of exchange rate stability (ER) of countries
in the sample
The degree of financial integration (FO) of countries in the sample
Figure 2.7 illustrates the degree of financial integration (FO) of countries
in the sample
2.3.2. The policy combinations in the context of trilemma:
Figure 2.8 illustrates the impossible trinity configuration in ten Asean
countries
2.3.3. The level of foreign exchange reserves and diamond patterns:
Figure 2.11 shows diamond patterns of the Asean countries in the sample
Chaper 3
Empirical results and discussion
12
3.1. Empirical results of testing the linearity among MI, ER, FO
The results of regression model (2.1) are extremely good, reflected in the
very high adjusted Rsquared figures (95% for full sample, and 97% for
subsample of developing countries). These results imply a linear
correlation among the impssible trinity indexes, and countries in the
sample actually had to face with the trilemma tradeoffs. All coefficients
are significant at 1%.
3.2. Empirical results of testing the impacts of policy choices to macroperformance
3.2.1. Impacts on the volatility output growth
The regression results for the full sample and the subsample.
The regression results for the full sample with dummy variable for
Vietnam.
Table 3.4: Summary of the impacts on the volatility of output growth
Model 1
Model 2
0.10
0.05

MI
ER
(0.05)
(0.10)
10 7 nước
nước
Independent
variables
MI
ER
Model 3
0.20
0.15
0.10
0.05
(0.05)
(0.10)
(0.15)
0.06
0.04
MI
VN
+/ unless
IR>32%
10 nước 7 nước
+/ unless
IR>30%
FO
IR>46%
32%30%
VN
Model 3
Full Developing Vietnam
Sample countries
+/ unless +/ unless
IR>43,8% IR>32%
+/ unless
IR>29%

Volatility of
(0.02)
Volatility of output growth
Model 3
Model 2
Full
Developing Vietnam
Full Developing Vietnam
Sample
countries
Sample countries
/ unless
/ unless / unless / unless
IR>42%
IR>100% IR>43% IR>34%
+/ unless
IR>46%
To reduce the
ER
10
7 nước
nước
VN
FO
0.02
FO
IR<100%
IR<43%
29%43,8%
%
output growth
Source: summarized and calculated from the Tables 3.2 and 3.3.
+/ unless
IR>50%
+/ unless
IR>24%

IR>32%
IR>50%
13
Table 3.4 illustrates the impacts of trilemma indexes to ouput growth
volatility, for each combination of the two policy choices. Monetary
independence indicator (MI) generally has a negative effect on output
growth volatility; greater exchange rate stability (ER) is likely to induce
output growth volatility as expectation. On the other hand, greater financial
integration (FO) comes at the cost of higher output growth volatility. These
effects can change when combined with the level of international reserves
(IR).
3.2.2. Impacts on the average of output growth
The regression results for the full sample and subsample
The regression results for the full sample with dummy variable for
Vietnam.
Table 3.7: Summary of the impacts on the average of output growth
0.15
Model 1
0.10
0.15
0.05
0.10

MI
(0.05)
ER
(0.10)
10 7 nước
nước
MI
ER
VN
Model 3
0.20
0.15
0.05
MI

FO
(0.05)
0.10
FO
0.05
ER

(0.10)
(0.15)
Independent
variables
Model 2
0.20
(0.15)
(0.05)
10 nước 7 nước
10 nước 7 nước
VN
Average of output growth
Model 2
Model 2
Full
Developing Vietnam
Full Developing Vietnam
Sample
countries
Sample countries
/ unless
/ unless
/ unless
IR>34%
IR>30%
IR>24%
+/ unless
IR>56%
+/ unless
IR>56%
+/ unless
IR>48%
FO
To increase the34%30%

+/ unless / unless
IR>39% IR>67,5%
24%67,5%
Average of
output growth
Source: summarized and calculated from the Tables 3.5 and 3.6.
VN
+/ unless
IR>39%
+

+/ unless
IR>23%
IR<39%
IR<23%
14
Table 3.7 illustrates the impacts of trilemma indexes to average ouput
growth, for each combination of the two policy choices. Monetary
independence indicator (MI) generally has a negative effect on average
output growth; greater exchange rate stability (ER) is likely to increase
average output growth. Greater financial integration (FO) is mostly to
lower average output growth, except for Vietnam interaction term. These
effects can change when combined with the level of international reserves
(IR).
3.2.3. Impacts on the volatility of inflation
The regression results for the fullsample and the subsample
The regression results for the fullsample with dummy variable for
Vietnam.
Table 3.10: Summary of the impacts on the volatility of inflation
2.00
Model 1
1.00
0.50
(0.50)
MI
(1.00)
ER
(2.00)
(4.00)
Volatility of

FO
(0.50)
ER
(1.00)
10 nước 7 nước
VN
Model 1
Full Developing Vietnam
sample countries
/ unless
/ unless
IR>50%
IR>108%
/ unless / unless
IR>43,5% IR>42%
Volatility of inflation
Model 2
Full Developing Vietnam
sample countries
/ unless
IR>121%
/ unless
IR>33,5%
IR<43,5%
IR<42%
10
7 nước
nước
VN
+/ unless
IR>25%
FO
To reduce the
FO
(1.50)
10 nước 7 nước
ER
0.50
MI
(2.00)
(3.00)
Model 3
1.00
(1.00)
(1.50)
MI
1.50


Independent
variables
Model 2
1.00
25%33%
33%25%
/ unless
IR>48%
/ unless
IR>29%
+/ unless
IR>32%
IR<25%
32%13%
IR<13%
15
Table 3.10 illustrates the impacts of trilemma indexes on the volatility of
inflation, for each combination of the two policy choices. Monetary
independence (MI) and exchange rate stability (ER) mostly have a
negative effect on the volatility of inflation; while financial integration
(FO) has different effect in each sample. These effects can change when
combined with the level of international reserves (IR).
3.2.4. Impacts on the average of inflation
The regression results for the fullsample and the subsample
The regression results for the fullsample with dummy variable for
Vietnam
Table 3.13: Summary of the impacts on the average of inflation
0.40
Model 1
0.40
Model 2
0.20
0.30
0.50
MI
0.20
ER
0.10
MI
(0.20)
FO
(0.40)
10 nước 7 nước
Independent
variables
MI
ER
10 7 nước
nước
VN
Model 1
Full Developing Vietnam
sample countries
+/ unless
+
+
IR>58%
+/ unless +/ unless
IR>54% IR>34,8%
IR>54%
IR>34,8%
FO
(1.00)
ER
VN
(2.00)
10 nước 7 nước
Average of inflation
Model 2
Full Developing Vietnam
sample countries

+
FO
To reduce the
(0.50)
(1.50)
(0.60)

IR>58%
Model 3
1.00
/ unless
/ unless
IR>26%
IR>32%
IR<26%
IR<32%
+
Full
sample
VN
Model 3
Developing Vietnam
countries
+/ unless
IR>26%
+/ unless
IR>23%
+/ unless
IR>18%
/ unless
/ unless
/ unless
IR>18%
IR>25%
IR>29%
23%89%
IR>42%
ER
/ unless
IR>42%
/ unless
IR>41%
/ unless
IR>40%
FO
To reduce the
/ unless
IR>38%
/ unless
IR>34%
+
+
+/ unless
IR>58%
/ unless
IR>69%
IR<34%
IR<69%
+/ unless / unless
IR>65% IR>20,6%
IR<41%
IR<40%
IR>65%
Model 3
Developing Vietnam
countries
IR<38%
Average of
unemployment rate
Source: summarized and calculated from the Tables 3.14 and 3.15.
17
Table 3.16 illustrates the impacts of trilemma indexes to the average of
unemployment rate, for each combination of the two policy choices.
Monetary independence indicator (MI) has a positive effect on the average
of unemployment rate; exchange rate stability (ER) has negative effect,
except for Vietnam interaction term in model 3. Greater financial
integration (FO) contributes to increase unemployment rate in subgroup of
developing Asean countries, except for Vietnam. These effects can change
when combined with the level of international reserves (IR).
3.3. Interactions between the Trilemma configurations and Financial
development, Government expenditure
Because the fact that importance of two control variables (private credit
and fiscal policy) in the basic model (2.2) has been proven but seemed
insignigicantin my thesis, I further analyzed the role of Financial
development and Government expenditure to the relationship between the
trilemma configurations and macroeconomic stability. On the basis of the
model (2.2), combined with expectations of the role of financial
development, government spending to macroeconomic stability, I adjusted
the model as follows:
Yit = γ0 + γ1PCit + γ2(ITit x IRit) + γ3(ITit x PCit) + uit
Yit = λ0 + λ1GEit + λ2(ITit x IRit) + λ3(ITit x GEit) + νit
(3.1)
(3.2)
where:
PCit (Private Credit) – PC high/ medium/ low: representing the level of
financial development, is a dummy variable of private credit creation as a
ratio to GDP of country i in year t, for different level groups of PC high/
medium/ low.
GEit (Government Expenditure) – GE high/ medium/ low: a dummy
variable of government expenditure as a ratio of general government final
consumption expenditure to GDP of country t in year t, for different level
groups of GE high/ medium/ low.
18
3.3.1. The role of Financial development
Effects of trilemma indexes on Ouput volatility
Effects of trilemma indexes on Inflation volatility
3.3.2. The role of Government expenditure
Effects of trilemma indexes on Ouput volatility
Effects of trilemma indexes on Inflation volatility
3.3.3. Financial development and government expenditure in Vietnam
Policy choices of Vietnam from 2000 to 2012: the thesis results showed
that Vietnam has selected independent monetary policy combined with a
stable exchange rate for the period from 20002003, and from 20082010;
the remaining years in sample, it was in favor of a stable exchange rate
policy combined with financial liberalization.
The degree of financial development in Vietnam from 2000 to 2012:
based on the ratio of private credit/ GDP and classification as described in
Section 3.3.1, Vietnam was ranked as medium financial market
development country (excluding 2009 and 2010 at high level).
The empirical analysis results imply that if Vietnamese government aims
at reducing the volatility of real income per capita, the policy combination
of exchange rate stability and monetary independence would be the choice
under the condition of a medium financial market development. Otherwise,
in order to stabilize inflation, the choice of combining independent
monetary policy and exchange rate stability proves more feasible.
The degree of government expenditure in Vietnam from 2000 to 2012:
According to the calculations of the thesis based on data from the
Worldbank and classifications described in Section 3.3.2, Vietnam was
ranked as the low government expenditure country.
The empirical analysis results imply that if Vietnamese government aims
at reducing the volatility of real income per capita, the policy combination
of monetary independence and financial liberalization would be the choice
19
in the context of low government expenditure. Otherwise, in order to
stabilize inflation, the choice of exchange rate stability could be followed.
Chapter 4
Policy reccomendation for Vietnam
4.1. Applying the impossible trinity theory in the policy selection
Based on the empirical results of the thesis, the development of financial
liberalization and the data of current foreign reserves of Vietnam (about 32
billion US dollars at the end of 2013, equivalent to about 20% of GDP), I
suggest policy combinations for each specific economic objectives:
 Stabilizing growth of real income per capita: greater monetary
independence and a higher financial liberalization (Model 2)  based on
the results in Table 3.3 and 3.4;
 Increasing real income per capita: exchange rate stability and
enhancing financial liberalization (Model 3)  based on the results in
Table 3.6 and 3.7;
 Stabilizing inflation rate: greater monetary independence and a higher
financial liberalization (Model 2)  based on the results in Table 3.9 and
3.10;
 Reducing the average inflation: greater monetary independence and a
higher financial liberalization (Model 2)  based on the results in Table
3.12 and 3.13;
 Reducing the average of unemployment rate: exchange rate stability and
enhancing financial liberalization (Model 3)  based on the results in
Table 3.15 and 3.16;
These results indicate that none of policy combinations is perfect to help
the Vietnamese government simultaneously achieve all macroeconomic
objectives. However, to achieve most of the goals, the model 2 combination of monetary independence and financial integration  is better
over all (although this option did not consider the requirements of foreign
exchange reserves). This choice is also appropriate with the inevitable
20
trend of increasing financial liberalization in developing countries, not
only in Vietnam. So that, the government should reduce its priorities for
exchange rate stability and create more space for monetary independence
and financial integration.
Based on the conditions of economic indicators in Vietnam, compared to
other countries in the sample (Figure 4.1), the priority order of objectives
should be: stabilize output growth, stabilize inflation rate, lower inflation
rate, improve income and lower unemployment rate.
4.2. Enhance the reputation and independence of the State Bank
Independence of policy objectives
Increasing transparency and accountability
Independence of the central bank personnel policy
4.3. Increasing the flexibility of the exchange rate
In a fixed exchange rate regime, that serves as a nominal anchor for
monetary policy, the monetary policy will lose their independence and can
not control inflation or deal with disturbances along with large capital
inflows. Therefore, in the context of increasing financial integration, more
flexible exchange rate should be the appropriate choice for a more
monetary independence policy.
4.4. Controling risks of financial integration
Maintain control of capital flow
Develop a healthy domestic financial markets
Strengthen market confidence
4.5. Enhance the accumulation of international reserves
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