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Abstract
This paper analyses the exchange rate pass-through effects (ERPT) into consumer prices in Vietnam with a pegged regime during 2001–2019 using a structural vector autoregressive approach. The model is identified based on the fit of data rather than a priori theorizing. Firstly, we find that the degree of ERPT in the country is higher than that in other emerging and developed economies. High and volatile inflation, a high degree of openness, and exchange rate regime are essential factors that explain the difference. Besides, we show that ERPT is positively correlated with the level and the volatility of inflation across sectors. Since the results are derived from a single country, the heterogeneity is more likely to be attributable to industry-specific rather than macro factors.
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No potential conflict of interest was reported by the authors.
Notes
1 Note that Vietnam does not allow free capital movement. Capital inflows are welcome, but outflows are strictly controlled. In particular, FDI inflows are freely permissible; portfolio capital inflows by non-residents are also free with few restrictions in terms of maximum capital ownership in some specific sectors; external borrowing is unrestricted for authorized dealers. Meanwhile, portfolio capital outflows and external lending are restricted for individual residents and corporates; FDI outflows are allowed with prior strict approval.
2 Quarterly GDP level data has only been available only since 2001:Q1 and we exclude observations in 2020 to avoid possible structural break due to the impact of the COVID-19.
3 Note that variables are ordered so that the most rigid one (output) is on the top and the least rigid one (exchange rate) is at the bottom. The result shows that all coefficients above matrix A’s diagonal are not statistically significant. Therefore, our matrix A looks similar to the one resulting from the Cholesky decomposition, except for three restrictions on a31, a42 and a43 below the diagonal.
4 According to the IMF’s annual reports on exchange arrangements and exchange restrictions, from 1999 to 2004, Vietnam followed an exchange rate regime which is classified as managed floating with no pre-announced path for exchange rate. The SBV attempts to influence the exchange rate by announcing daily an official rate of the home currency against the U.S. dollar.
From 2005 to 2008, the IMF reclassified the exchange rate regime of Vietnam to the category of conventional fixed peg arrangements. The SBV pegs its currency within margins of ±1 percent or less vis-à-vis the U.S. dollar.
From 2009 to 2016, the IMF reclassified the exchange rate regime of Vietnam as stabilised arrangement indicating that flexibility is limited vis-à-vis the U.S. dollar.
From 2016 to present, the IMF has continued to classify the exchange rate regime of Vietnam as stabilised arrangement. The official exchange rate of Vietnamese dong against the U.S. dollar is announced daily based on a basket of currencies.
5 Throughout the study sample, the monetary policy in Vietnam always has duo (final) targets, namely inflation and GDP growth. The weights on the two targets vary depending on the government (as the SBV is not independent). In addition, since early 2016, the SBV has changed the way it sets the central exchange rate (see Section 2). Given a relatively short sample, we carry out the Chow forecast test for a structural break around 2016Q1. The result indicates that we cannot reject the null of no structural breakpoint at any conventional significance levels. The test result is available upon request.
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Notes on contributors
The Anh Pham
The Anh Pham is an associate professor of macroeconomics at Department of Economics at National Economics University (NEU) in Hanoi, Vietnam. He received his Ph.D. at the University of Manchester UK in 2007. His research focuses on growth and volatility, price setting behavior and monetary policy. He has intensive consultancy experience with Vietnam government agencies, NGOs, and business sector. Some of his recent publications in international journals include: Pham, A. T. 2018. “Policy Volatility and Growth.” Portuguese Economic Journal 17 (2). Pham, A. T. 2019. “Price Adjustment Lags and Their Asymmetry in Vietnam.” International Journal of Economics and Business Research, 17 (3). Pham, A. T. 2021.
Hoang Huy Nguyen
Hoang Huy Nguyen is an associate professor of finance in the Merrick School of Business. After receiving his Ph.D. from the University of Central Florida in 2007, he began teaching at UB. His teaching interests include Corporate finance, International finance and Investments. His research focuses on Market anomalies, market momentum, stock split and institutional investors behavior. Some of his recent publications include Nguyen, H. H. 2019. “Price Adjustment Lags and Their Asymmetry in Vietnam.” International Journal of Economics and Business Research 17 (3). Nguyen, H. 2018. “How Do Investors Price Stocks? Evidence with Real Time Data from Vietnam.” International Journal of Finance and Economics 23 (4): 13. Nguyen, H. H. 2017. “Market Reaction and Multiple Financial Restatements.” Advances in Quantitative Analysis of Finance & Accounting.
Dinh Ngoc Nguyen
Dinh Ngoc Nguyen is lecturer and PhD candidate at Department of Economics, National Economics University, Vietnam.
Linh Manh Vu
Linh Manh Vu is lecturer and PhD candidate at Department of Economics, National Economics University, Vietnam.