Financial conditions index and economic growth: Empirical evidence from Vietnam

Abstract

This paper measures and investigates the impact of the financial conditions index (FCI) on Vietnam's economic growth. Using principal component analysis (PCA) and a monthly time series macroeconomics dataset from January 2013 to December 2022, we calculated Vietnam's FCI. Furthermore, this paper employs the autoregressive distributed lag (ARDL) model to assess the influence of the FCI on Vietnam's economic growth, both in the short and long term. Research results indicate that easing financial conditions will promote Vietnam's economic growth in the short term. In addition, factors such as public investment, the labour employment index of industrial enterprises, exports, and the M2 money supply positively influence Vietnam's economic growth. In contrast, imports have a negative impact on Vietnam's economic growth in both the short-term and long-term models. This paper proposes several strategies for policy enforcement agencies to enhance the effectiveness of monetary policy management in Vietnam. These include: (i) encouraging public investment and foreign trade, especially by increasing exports; and (ii) keeping monetary and credit policies flexible and closely watching both domestic and international macroeconomic developments so that they can have ready-made policies for how to respond. Our research findings and recommendations are useful to policymakers and investors.