Luận văn thạc sĩ UEH exchange rate pass through to vietnam’s import and domestic prices

UNIVERSITY OF ECONOMICS INSTITUTE OF SOCIAL STUDIES

HO CHI MINH CITY THE HAGUE

VIETNAM THE NETHERLANDS

VIETNAM - NETHERLANDS

PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS

EXCHANGE RATE PASS-THROUGH TO VIETNAM’S

IMPORT AND DOMESTIC PRICES

BY

CAI BAO HIEU

MASTER OF ARTS IN DEVELOPMENT ECONOMICS

HO CHI MINH CITY, DECEMBER 2012

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UNIVERSITY OF ECONOMICS INSTITUTE OF SOCIAL STUDIES

HO CHI MINH CITY THE HAGUE

VIETNAM THE NETHERLANDS

VIETNAM - NETHERLANDS

PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS

EXCHANGE RATE PASS-THROUGH TO VIETNAM’S

IMPORT AND DOMESTIC PRICES

A thesis submitted in partial fulfilment of the requirements for the degree of

MASTER OF ARTS IN DEVELOPMENT ECONOMICS

By

CAI BAO HIEU

Academic Supervisor:

Dr. DINH CONG KHAI

HO CHI MINH CITY, DECEMBER 2012

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Contents

Chapter 1: Introduction ..................................................................................................... 1

1.1 Problem statement.................................................................................................. 1

1.2 Research questions................................................................................................. 2

1.3 Research objectives................................................................................................ 3

Chapter 2: Overview of Vietnam’s exchange rate, import activities and inflation .......... 4

2.1 Exchange rate arrangement in Vietnam................................................................. 4

2.2 Overview of Vietnam’s import activities............................................................... 7

2.3 Overview of Vietnam’s inflation ........................................................................... 8

Chapter 3: Literature review ........................................................................................... 10

3.1 Linear approarch .................................................................................................. 10

3.2 Vector Error Correction Model approach............................................................ 11

3.3 Vector Autoregression approach.......................................................................... 11

Chapter 4: Research methodology, empirical framework and data description ............. 14

4.1 Research methodology......................................................................................... 14

4.2 Empirical framework ........................................................................................... 16

4.3 Data description ................................................................................................... 17

Chapter 5: Empirical results............................................................................................ 20

5.1 ADF tests.............................................................................................................. 20

5.2 Optimal lag length................................................................................................ 20

5.3 VAR regression.................................................................................................... 20

5.4 Impulse response function: .................................................................................. 24

5.4.1 Response to exchange rate of foreign price index ........................................ 24

5.4.2 Response to exchange rate of import price index ......................................... 25

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5.4.3 Response to exchange rate of consumer price index .................................... 26

5.4.4 Response to foreign price index of import price index................................. 27

5.4.5 Response to foreign price index of consumer price index ............................ 28

5.4.6 Response to output gap of money supply ..................................................... 29

5.4.7 Response to output gap of consumer price index ......................................... 30

5.4.8 Response to money supply of consumer price index.................................... 31

5.4.9 Response to import price index of money supply......................................... 32

5.4.10 Response to import price index of consumer price index............................. 33

5.4.11 Response to consumer price index of money supply.................................... 34

5.5 Variance decomposition....................................................................................... 35

5.6 Granger causality test........................................................................................... 36

5.7 VAR stable........................................................................................................... 37

5.8 Lagrange multiplier test ....................................................................................... 38

Chapter 6: Conclusion, Policy Recommendation and Future Work............................... 39

6.1 Conclusion ........................................................................................................... 39

6.2 Policy Recommendation ...................................................................................... 40

6.3 Future Work ......................................................................................................... 41

References ......................................................................................................................... 42

Appendices ........................................................................................................................ 45

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List of figures

Figure 1: REER, NEER and Exchange rate 1995-2012...................................................... 6

Figure 2: Import by commodity group of Vietnam 1995-2010........................................... 7

Figure 3: Inflation of Vietnam 1996-2010 .......................................................................... 8

Figure 4: NEER, IMP and CPI of Vietnam 1999-2011 ...................................................... 9

Figure 5: Response to exchange rate of foreign price index ............................................. 25

Figure 6: Response to exchange rate of import price index .............................................. 26

Figure 7: Response to exchange rate of consumer price index ......................................... 27

Figure 8: Response to foreign price index of import price index...................................... 28

Figure 9: Response to foreign price index of consumer price index................................. 29

Figure 10: Response to output gap of money supply ........................................................ 30

Figure 11: Response to output gap of consumer price index ............................................ 31

Figure 12: Response to money supply of consumer price index....................................... 32

Figure 13: Response to import price index of money supply............................................ 33

Figure 14: Response to import price index of consumer price index................................ 34

Figure 15: Response to consumer price index of money supply....................................... 35

Figure 16: VAR stable....................................................................................................... 37

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List of tables

Table 1: VAR regression for import price index............................................................... 21

Table 2: VAR regression for consumer price index.......................................................... 23

Table 3: Larange multiplier test ........................................................................................ 38

Table 4: ADF test of dlneer1 ............................................................................................. 46

Table 5: ADF test of dlimp................................................................................................ 46

Table 6: ADF test of dlcpi................................................................................................. 47

Table 7: ADF test of dlm2................................................................................................. 47

Table 8: ADF test of dlopi................................................................................................. 47

Table 9: ADF test of dlpi................................................................................................... 47

Table 10: Optimal lag length............................................................................................. 48

Table 11: Granger causality test........................................................................................ 48

Table 12: Vector Autoregression results........................................................................... 50

Table 13: Impulse - Response Function ............................................................................ 57

Table 14: Variance decomposition.................................................................................... 69

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Abbreviations

ADB Asian Development Bank

ADF Augmented Dickey-Fuller

ARIC Asia Regional Integration Center

CPI Consumer Price Index

ERPT Exchange Rate Pass-Through

FPI Foreign Price Index

GAP Output Gap

GSO General Statistics Office Of Vietnam

HP Hodrick-Prescott Filter

IFS International Financial Statistics

IMF International Monetary Fund

IMP Import Price Index

M2 Broad Money Supply

NEER Nominal Effective Exchange Rate

OPI Oil Price Index

REER Real Effective Exchange Rate

USD United States dollar

VAR Vector Autoregression

VECM Vector Error Correction Model

VND Vietnam Dong

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Acknowledgement

I would like to give my sincerest thanks to my supervisor, Dr. Dinh Cong Khai, who

has provided me valuable support throughout the process of this thesis. My study

would not have been possible without his patience, encouragement, insightful

comments and correction in all time of doing the research and writing the paper.

I am also deeply grateful to Dr. Le Van Chon for his dedicated, generous, enthusiasm

and thoughtful helps about Stata technique and Econometrics model. Thank to those

important guidance and useful advice, I have overcome many obstacles to complete

the research work.

Last but not least, I would like to give a big gratitude to my dear family and friends

who always encourage and stand beside me during my difficult moments. Their love

have inspired me a lot and lifted me up; hence my mere expression of thanks does not

suffice.

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