Subject:
"The Impact of Real Exchange Rate on Output and Inflation in Vietnam"

by
Ms. Nguyen Thi Thuy Vinh
(Graduate School of International Cooperation Studies, Kobe University)

Summary

VDF-Tokyo welcomed Ms. Nguyen Thi Thuy Vinh, from the Graduate School of International Cooperation Studies (GSICS) of Kobe University, to present her research on the impact of real exchange rate on output and inflation in Vietnam.

According to the presenter, exchange rate regime in Vietnam had been under critical reforms through various steps, along with the Doi moi (renovation) policies since 1986. Exchange rate had also been considered by the Vietnamese government as an important macroeconomic instrument for numerous policy purposes, including ensuring low inflation rate and a stable financial market, promoting exports, and enhancing economic growth. Though, a few studies had been conducted to specify the impact of exchange rate on such crucial macroeconomic indicators as output and inflation. And in Vietnam, there had also been no published studies on the topic. To pursue this topic for Vietnam, Ms. Vinh applied the vector autoregression (VAR) model based on Kamin and Rogers (2000) with monthly data from January 1992 to April 2005.

Before making analysis on the models and estimations, Ms. Vinh continued the presentation with a more detailed discussion on the exchange arrangements in Vietnam over the past decade. It was obvious that the exchange rate regime was changed substantially to meet the demand for changes from a centrally-planned economy to a market-based economy. These changes had helped the government to stabilize the economy, as well as promote more integration to the regional and global economies.

The presentation went further with explanations of theoretical framework. As mentioned earlier, the model in the research was based on the core model by Kamin and Rogers (2000), which was used to evaluate the Mexico’s case, and VAR is applied. In the VAR model, log of real industrial output, log of consumer price index, and log of real exchange rate were endogenous variables, while nominal US interest rate was exogenous variable. In addition to this core model, the author also used two alternative models, in which monetary supply was added up to VAR model to setup the first alternative model, while the second alternative model was created by inserting trade balance deficit to VAR model.

[For more information about the models, please see the presentation attached to this summary*]

As usual, Prof. Kenichi Ohno ignited the discussion section by asking Ms. Vinh to explain more clearly about the definition of real exchange rate, and the theoretical background of its impact on output and price level by monetary and Mundell-Fleming approaches. More specifically, he suggested the author check whether the foreign price (P*) was still valid by using only USD because Vietnam had also been attached to other hard currencies, such as Euro and Japanese Yen. In addition, the author should separate normal and crisis cases in explaining appreciation or depreciation, which was important factor that determined some variables in the models. Also on this issue, Mr. Mac Quang Huy (Lehman Brothers Japan Inc.) commented that explanation by monetary or Mundell-Fleming approach depended upon the output structure, i.e. import-oriented or export-oriented economy. Moreover, he wondered why data did not cover the pre-1992 period, in which many interesting and remarkable events happened. In response, Ms. Vinh said that the data availability only allowed her to pursue such definition of real exchange rate in the analysis. However, she agreed with the validity of those criticisms, and would like to take them for further studies on this topic.

Regarding the model construction, Prof. Ohno said that, although bilateral trade between Vietnam and the US increased over time, he was not sure how the US interest rate had impact on the Vietnamese economy, because the VAR model in the research was based on Kamin and Rogers (2000) for Mexico – an economy that had been deeply attached to the US. Going more details with estimation, Mr. Pham Truong Hoang (YNU & VDF-Tokyo) wondered how the author calculated the real exchange rate for Vietnam prior 1995, in which Vietnam and the US were not economically attached. Further, Mr. Hoang also wondered about the impact of the Asian financial crisis on the real exchange rate in Vietnam. To add up with these comments, Mr. Huy also raised a question about other factors that could induce inflation problem, such as bird flu, oil price, and government spending. In her responses, Ms. Vinh said that she did think about these factors, but she was not able to collect consistent and sufficient data for these considerations. Though, she would try to conduct different shocks/events to the models to see how the results would change.

Going back to the estimates from the models, Prof. Ohno thought that the results were generally in line with initial expectation, but it would be better to consider other important variables that could have impacts on real exchange rate as well as output and inflation, such as substantial flows of foreign investments and remittances to Vietnam recently. He also agreed with the author that Vietnam should move to a more flexible exchange rate regime, and such movement depended on the financial market development. According to him, more important policy task was that financial liberalization and flexible exchange rate regime should be conducted without bubble or crisis.

Ms. Vinh took all these comments with deep thanks to Prof. Ohno and other participants. She said that it would be surely better to take more factors and variables into the models. She would conduct and share the new estimated results in the coming time.

The workshop was closed after another hour for exchanging information. Some new participants introduced themselves, and expressed their wishes to work with VDF in both Hanoi and Tokyo.

Abstract (PDF22KB) | Slides (PDF115KB)
(Due to copyright issue, please contact directly the author to get the full paper)

 (By Giang Thanh Long)