Understanding exchange rate pass-through in Vietnam

Abstract

Price stability is the ultimate objective of the State Bank of Vietnam (SBV). In addition, in a small export-led economy, such as Vietnam, the study of exchange rate volatility is crucial for the country’s economy due to its impact on inflation via exchange rate pass-through (ERPT). This study investigated ERPT in Vietnam by employing both autoregressive distributed lag (ARDL) and nonlinear-ARDL (NARDL) approaches with data spanning from January 2009 to May 2020. Our main findings suggest that the exchange rate and money supply are the two most important factors influencing the consumer price index (CPI) and explain the change in the CPI structure using the threshold model. In addition, the transition to a central-rate mechanism successfully lowered the inflation rate in Vietnam. Furthermore, the NARDL model displays short- and long-run exchange rate asymmetries. Based on this evidence, several policy implications are provided to support price-level stability.

Keywords:

• ERPT
• exchange rate regime
• inflation
• asymmetric
• threshold model
• Vietnam
• nonlinear-ARDL

PUBLIC INTEREST STATEMENT

The impact of exchange rate volatility on inflation is of great interest to economists and all citizens. Considering the different effects between devaluation and appreciation of domestic currency on the consumer price index (CPI) is important for the monetary authority. In addition, other macro factors, such as money supply and oil price, also affect CPI. Inconsistent conclusions on the impact of exchange rates on inflation are the driving force behind investigating exchange rate pass-through in Vietnam. The results highlighted the significance of the devaluation of VND and money supply on the CPI in Vietnam. Moreover, the transition to a central-rate mechanism successfully lowered the inflation rate in Vietnam. Furthermore, this study shows that both the exchange rate and money supply influence changes in the CPI structure. Based on these results, several policy implications are provided to support price-level stability.

Acknowledgements

“This research is funded by University of Economics and Law, Vietnam National University Ho Chi Minh City/VNU-HCM”

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

1. Please see Appendix 1 for more detail.

2. The estimation of the threshold model is conducted following the manual instruction of Stata at the website: https://www.stata.com/manuals/tsthreshold.pdf

3. Please see the appendix 2 for more detail.

Additional information

Funding

The authors would like to thank Van Lang University, Vietnam for funding this work.

Notes on contributors

Nga Nguyen Hong

Nga Nguyen Hong is an Associate Professor in the Faculty of Economics, University of Economics and Law, Vietnam National University Ho Chi Minh City. His research interests include international economics and development economics. He has published several papers in quality domestic and international journals.

Loan Vo Thi Kim

Loan Vo Thi Kim is a Ph.D. at the Faculty of Basic Science, Van Lang University, Ho Chi Minh City, Vietnam. Her research interests include international economics, development economics, banking, and human resource management. She has published several papers in acclaimed domestic and international journals.

An Pham Hoang

An Pham Hoang is a Ph.D. at the Faculty of Accounting and Finance, Van Hien University, Ho Chi Minh City, Vietnam. His research interests include international economics, financial management, banking, and risk management.

Cuong Tran Quoc Khanh

Cuong Tran Quoc Khanh Tran is a lecturer at the Faculty of Business Administration, Van Lang University. His research interests include international economics, development economics, and international trade. He has published several papers in acclaimed domestic and international journals.