Impact of basic macroeconomic factors on the exchange rate in Vietnam, 2018

MINISTRY OF EDUCATION AND TRAINING STATE BANK OF VIETNAM

BANKING UNIVERSITY HO CHI MINH CITY

TRAN DANG BAO TRAN

IMPACT OF BASIC MACROECONOMIC FACTORS ON THE

EXCHANGE RATE IN VIET NAM

GRADUATION DISSERTATION

MAJOR: FINANCE - BANKING

CODE: 7340201

HO CHI MINH CITY, 2018

MINISTRY OF EDUCATION AND TRAINING STATE BANK OF VIETNAM

BANKING UNIVERSITY HO CHI MINH CITY

TRAN DANG BAO TRAN

IMPACT OF BASIC MACROECONOMIC FACTORS ON THE

EXCHANGE RATE IN VIET NAM

GRADUATION DISSERTATION

MAJOR: FINANCE - BANKING

CODE: 7340201

SUPERVISOR

DR. HA VAN DUNG

HO CHI MINH CITY, 2018

I

ABSTRACT

This dissertation studies the impact of basic macroeconomic factors on

the exchange rate in Vietnam and build regression model for estimating exchange

rate. Based on the quarterly data from the first quarter of 2000 to the fourth quarter

of 2015 and the research variables include: exchange rates between VND and USD,

economic growth (gross domestic product) , inflation (consumer price index), interest

rate (deposit rate).

Firstly, the thesis will explore the theory of selected variables and, at the same

time, the author also learns the theory of the relationship between selected macro

variables and the exchange rate. The thesis also refers, using previous relevant

documents, to make hypotheses about the impact direction of macro variables to

exchange rates and build research model based on previous research study.

Secondly, the study uses matrix correlation to examine the correlation between

variables. Next, the thesis uses the Augmented Dickey-Fuller method to test the

stationary of the time series. Then, the thesis uses the VAR model to assess the impact

of macro variables on the exchange rate.

The empirical results show that the variables that have a statistically

significant effect on the explanatory variables which are the macro factors and

dependent variable which is the exchange rate. At the same time, the thesis also

provides the direction of impact of macro factors on exchange rate through impulse

response function method, the results are in the following order: economic growth

has a positive impact on the exchange rate, the interest rate has the opposite effect to

the exchange rate and the consumer price index has the opposite effect to the

exchange rate.

II

DECLARATION OF AUTHENTICITY

This dissertation is my own research, the results and data collection of which

are true, without prior publication of content or other content that is performed by

others except for the references are cited in full source in the thesis.

Ho Chi Minh, December, 2018

Tran Dang Bao Tran

III

ACKNOWLEDGEMENT

First of all, I want to send my gratitude and respect to Dr. Ha Van Dung for

his sharing, understandings and considerate supports to give me useful

recommendations and guidances during my study.

Finally, best regards to my lecturers, my friends, my classmates and my

beloved BUH for their sharing and supports during my Bachelor program.

IV

TABLE OF CONTENTS

ABSTRACT...............................................................................................................I

DECLARATION OF AUTHENTICITY.............................................................. II

ACKNOWLEDGEMENT.....................................................................................III

LIST OF ABBREVIATIONS ............................................................................. VII

LIST OF TABLES..............................................................................................VIII

LIST OF FIGURE .................................................................................................IX

CHAPTER 1: INTRODUCTION........................................................................... 1

1.1. The necessity of the thesis................................................................................1

1.2. Research objectives..........................................................................................3

1.3. Research question.............................................................................................4

1.4. The research subject and scope of the study ....................................................4

1.4.1. The research subject ..................................................................................4

1.4.2. Scope of study ...........................................................................................4

1.5. Research method ..............................................................................................4

1.6. Research contribution.......................................................................................4

1.6.1. The scientific contribution.........................................................................4

1.6.2. The practical contribution..........................................................................5

1.7. Research structure ...........................................................................................5

1.8. Chapter conclusion...........................................................................................5

CHAPTER 2: THEORETICAL BACKGROUND AND OVERVIEW OF

PREVIOUS RESEARCH........................................................................................ 7

2.1. Theory of exchange rate...................................................................................7

2.1.1. The concept of exchange rate ....................................................................7

2.1.2. Types of exchange rates ............................................................................7

2.1.2.1. Nominal exchange rate ...........................................................................7

2.1.2.2. Real exchange rate..................................................................................8

V

2.1.2.2.1. Bilateral real exchnage rate (BRER)...................................................8

2.1.2.2.2. Real effective exchange rate (REER)..................................................9

2.2. Macroeconomic factors....................................................................................9

2.2.1. Economic growth.......................................................................................9

2.2.2. Inflation ...................................................................................................11

2.2.3. Interest rate ..............................................................................................12

2.3. The relationship between the exchange rate and macroeconmic factors and

previous researchs.................................................................................................13

2.3.1. The realtionship between the exchange rate and economic growth ........13

2.3.2. The relationship between interest rate and the exchange rate .................15

2.3.3. The relationship between inflation and exchange rates...........................17

2.4. Empirical studies............................................................................................18

2.5. Chapter conclusion.........................................................................................26

CHAPTER 3: RESEARCH METHODOLOGY ................................................ 27

3.1. Research process............................................................................................27

3.2. Research data .................................................................................................27

3.3. Data collection ...............................................................................................28

3.4. Research model ..............................................................................................28

3.5. Hypothesis......................................................................................................30

3.6. Steps of data analysis and estimation.............................................................31

3.7. Chapter conclusion.........................................................................................34

CHAPTER 4: EMPIRICAL RESULTS.............................................................. 35

4.1. Test of stationatity..........................................................................................35

4.2. Matrix correlation...........................................................................................36

4.3. The result of VAR model...............................................................................37

4.3.1. The stability of the model........................................................................40

4.3.2. Residual diagnosis...................................................................................41

4.4. Granger causality test.....................................................................................41

4.5. Impulse response function (IRF)....................................................................42