The interaction between fiscal policy, macroprudential policy and financial stability in Vietnam: An application of structural equation modeling

Abstract

This paper studies the impacts of fiscal policy, macroprudential policy as well as their interaction on financial stability in Vietnam during the global economic crisis 2008–2009. Using Structural Equation Modeling (SEM), the study shows that both fiscal policy and macroprudential policy have a great impact on the financial stability. In particular, fiscal policy has a negative impact while macroprudential policy shows a positive effect on the financial stability in Vietnam. Besides, evidences that indicate a negative relation between the fiscal policy and macroprudential policy in Vietnam are also implied in the study’s outcomes. With those results, the authors come to conclusion that Vietnam should execute macroeconomic policies, especially the fiscal policy and macroprudential policy, with caution and consideration of their interaction in order to take the best advantage of their coordination towards financial stability.