Changes in the Law on State Bank of Vietnam in 2010 signal a move toward an ‘inflation-targeting-type’ central bank. Using quarterly data for Vietnam during period 1996–2012, the purpose of this paper is twofold. First, the determinants of inflation are analysed using a single equation method.

The results suggest that inflation inertia, GDP growth of major trading partners, domestic currency depreciation and credit growth are the main determinants of Vietnam inflation. Second, the monetary transmission mechanisms are examined using VAR models. The results indicate that the interest rate plays a modest role in affecting output and inflation, as compared to the exchange rate and credit channels. Both findings suggest that an inflation targeting central bank is still very far away for the case of Vietnam.