Is Vietnam's exchange rate overvalued?

ABSTRACT

This paper focuses on Vietnam's exchange rate whose official rate has been pegged by the State Bank against the US dollar since 1989 despite wider market liberalisation over this time. Whether Vietnam's official exchange rate is appropriately valued has important implications for the economy's international competitiveness, trade balance and gross domestic product (GDP). The main aim of the paper is to assess whether the official exchange rate has been valued appropriately with reference to macroeconomic fundamentals, as proposed by the purchasing power parity and the behavioural equilibrium exchange rate approaches to evaluating equilibrium exchange rates. Our main empirical finding based on co-integration analysis using quarterly data from 1995 to 2014 is that according to both these approaches the Vietnamese Dong was significantly overvalued for extended times, most notably due to Vietnam's relatively high inflation rate.

KEYWORDS:

• Vietnam
• exchange rate
• overvalued

JEL CLASSIFICATION:

• F31
• O24

Acknowledgments

The authors are grateful to the Editor and anonymous reviewers for constructive comments.

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

1. The macroeconomic data are available for Vietnam only after the Vietnam government implemented a reform programme transferring the economy from central planning model to market model. These reforms came into effect in 1990 and data are available only from 1995.

2. ADF test used a maximum of 11 lags; however, optimum number of lags is one based on Schwarz Information Criterion. The PP test used automated bandwidth estimator employing Bartlett kernel (Andrews, 1991) and Newey–West (Newey and West, 1987) serial correlation correction.

3. The results of three lag length selection tests, Akaike information criteria (AIC), sequential modified LR test statistics and final prediction error (FPE) indicated that the optimal lag length is 5.

4. REER is calculated as follows: REER_t is the real effective exchange rate of the home country at time t; n is the number of trading-partner currencies in the trade basket; e_jt is the nominal bilateral exchange rate relative to currency j, measured as the number of units of currency j per unit of the domestic currency, and expressed as an index; w_jt is the weight assigned to currency j at time t, reflecting the contribution of the country of currency j to the home country's foreign trade; and P_t is the domestic price index at time t and P_jt is the price index of foreign country j at time t. The data sources are as follows. The data for the variables e_jt and P_t were collected from the State Bank of Vietnam. The data for Pj_t were collected from IMF. The trade weights w_jt are author's calculation using data from Vietnamese General Statistics Office.

5. See Cerra and Saxena (2002) for a similar approach.

Additional information

Notes on contributors

Duy Hung Bui

Hung Bui is a lecturer at the Banking Academy, Hanoi, Vietnam and holds a PhD in economics from Griffith University.

Anthony J Makin

Anthony J Makin is a professor of economics in the Griffith Business School and director of the APEC Study Centre at Griffith University with expertise in international finance.

Shyama Ratnasiri

Shyama Ratnasiri is a senior lecturer in economics in the Griffith Business School with expertise in development economics and applied econometrics.