Impact of money supply and macroeconomic indicators on foreign portfolio investment: Evidence from Vietnam

Abstract

This study examines the relationship between money supply, macroeconomic indicators, and foreign portfolio investment in Vietnam. Using the Autoregressive Distributed Lag Model and Stata 17 software to analyze quarterly data from Q1/2007 to Q4/2022, the analysis reveals strong and enduring correlations. An increase in money supply and economic growth positively influences foreign portfolio investment, with the money supply from the previous quarters significantly impacting foreign portfolio investment (P-value < 0.01). However, foreign exchange rates and foreign direct investment negatively affect foreign portfolio investment. Three macroeconomic indicators show significance at 1% and 5%, where gross domestic product positively affects foreign portfolio investment, while foreign exchange rates and foreign direct investment have detrimental impacts. The findings indicate that a 1% increase in gross domestic product leads to a USD 50.426 million increase in foreign portfolio investment, while a USD 1 million increase in foreign direct investment results in a USD 0.025 million decrease. Foreign exchange rates significantly affect foreign portfolio investment, with the potential for reduction through VND devaluation or an increase in the VND/USD exchange rate due to government adjustments. Definitive conclusions about external debt, interest rates, and inflation require additional data and research. The study’s R-squared value is 0.2738, with an adjusted R-squared of 0.1813, explaining 27.38% of future changes in Vietnam’s foreign portfolio investment. These findings have important implications for policymakers, suggesting that expanding the money supply and implementing suitable interest rate policies could enhance foreign portfolio investment attractiveness in the nearest term. AcknowledgmentThe author would like to thank the board of editors and the anonymous reviewers for their time and suggestions, which were most helpful in improving this article.