Do Central Banks Respond to Inflation Movements? An Interest Rate Policy Investigation

Abstract

This study applies the new Keynes model DSGE with a system of equations based on a theoretical framework that reflects the behavior of households, entrepreneurs, financial institutions, and the state bank in the real – small economy in Viet Nam. The paper aims to clarify the impulse response function of the macroeconomic variables by the policy shocks. Particularly, the study uses the quarterly time-series data of the policy interest rate, the output gap and the inflation in the 2000 – 2020 period to provide empirical evidence of the tightened policy interest rate causing the output gap and inflation to decrease. Finally, the study affirms that the DSGE model plays a crucial role in analyzing and initially forecasting the changes in policy toward sustainable and stable growth.