Inflation dynamics and monetary policy transmission in Vietnam and emerging Asia

•The key drivers of inflation in the short-run are movements in the nominal effective exchange rate.•Credit growth has a significant positive impact on inflation over the medium-term horizon of 2-10 quarters.•Positive growth shocks generate inflationary pressures after 4 quarters, and the impact lasts for the next 5 quarters.•Interest rate shocks have a significant impact on GDP growth and on credit growth over the short- to medium-term.•Vietnam shows a much higher degree of persistence in inflation than other emerging market Asian economies.

This paper provides an overview of inflation developments in Vietnam in the years following the doi moi reforms, and uses empirical analysis to answer two key questions: (i) what are the key drivers of inflation in Vietnam, and what role does monetary policy play? and (ii) why has inflation in Vietnam been persistently higher than in most other emerging market economies in the region? It focuses on understanding the monetary policy transmission mechanism in Vietnam, and in understanding the extent to which monetary policy can explain why inflation in Vietnam has been higher than in other Asian emerging markets over the past decade.