Luận án: Tỷ giá hối đoái và Quan hệ với Cán cân Thương mại Việt Nam

UNIVERSITY OF ECONOMICS INSTITUTE OF SOCIAL STUDIES HO CHI MINH CITY THE HAGUE VIETNAM THE NETHERLANDS VIETNAM - NETHERLANDS PROGRAMME FOR M. IN DEVELOPMENT ECONOMICS THE EXCHANGE RATE MISALIGNMENT AND ITS RELATIONSHIP WITH TRADE BALANCE: THE CASE OF VIETNAM BY CAO THANH BÌNH MASTER OF ARTS IN DEVELOPMENT ECONOMICS HO CHI MINH CITY, AUGUST 2013 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com 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 THE EXCHANGE RATE MISALIGNMENT AND ITS RELATIONSHIP WITH TRADE BALANCE: THE CASE OF VIETNAM A thesis submitted in partial fulfilment of the requirements for the degree of MASTER OF ARTS IN DEVELOPMENT ECONOMICS BY CAO THANH BÌNH Academic Supervisor: PHẠM THỊ THU TRÀ HO CHI MINH CITY, AUGUST 2013 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com Acknowledgement I would like to express sincere gratitude to my supervisor – Dr Pham Thi Thu Tra for scientific guidance, patient encouragement and useful advices, which she has provided throughout the time of preparation and accomplishment of this paper. I also would like to thank to Prof Howard Nicholas who gave helpful comments on the draft. Special thanks to Prof Nguyen Trong Hoai, and Dr Pham Khanh Nam for guidance and support as our program administrators.

I also would like to give my deepest thanks to my parents, and my beloved wife Khanh Linh for her spiritual supports, encouragements. i LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com Table of contents Acknowledgement. i Table of contents. ii List of tables.

iv List of figures. vii CHAPTER 1: INTRODUCTION .2 Background, and problem statement .1 A brief history of Vietnamese exchange rate policy .2 Recent Vietnam economic concerns .3 Research objectives and research questions .4 Justification of the study.5 Scope and limitation of the study .6 Organization of the study .6 CHAPTER 2: THEORETICAL FRAMEWORK .2 Overview of exchange rate misalignment .3 Theoretical background of exchange rate misalignment.1 The Purchasing Power Parity approach .2 The Fundamental Equilibrium Exchange Rate .3 The Behavioral Equilibrium Exchange Rate .28 CHAPTER 3: DATA AND RESEARCH METHODOLOGY .30 ii LUAN VAN CHAT LUONG download : add luanvanchat@agmail.2 The PPP approach.3 The trade balance .4 The BEER approach .1 Real effective exchange rate (REER) .3 The calculation of the Real Exchange Rate Misalignment.4 The econometric procedure of the BEER approach .33 CHAPTER 4: THE HISTORY OF ER MANAGEMENT IN VIETNAM.2 Vietnam exchange rate history .46 CHAPTER 5: FINDINGS AND DISCUSSIONS .2 Equilibrium real exchange rate and misalignment .3 The relationship between the PPP exchange rate misalignment and the Vietnam’s trade balance .1 The Vietnam’s trade structure .4 The movement of several Asian currencies .65 CHAPTER 6: CONCLUSIONS AND RECOMMENDATIONS .3 Limitations and directions for further studies .2 Directions for further studies. 78 iii LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com List of tables Table 1: Several results of empirical researches for Chinese Renminbi .22 Table 2: Empirical studies of real ER misalignment in several countries .24 Table 3: The measurements and expected signs of variables .32 Table 4: Critical values for Dickey Fuller test .35 Table 5: Inflation and exchange rate trends in 1985 – 1992 .41 Table 6: Descriptive statistics .47 Table 7: The correlation matrix of variables .48 Table 8: The values of stationary tests of all variables .49 Table 9: Regression result .50 Table 10: The values of stationary tests for residual (at level) .51 Table 11: Summary of estimating ER misalignment results in case of LICs .53 Table 12: The values of ER misalignment, according to BEER method.78 Table 13: The values of ER misalignment, according to PPP method .79 List of figures Figure 1: Inflation rate from period 1996Q1 to 2011Q3. 3 Figure 2: Trade balance of all goods and services from 1995 to 2012.

4 Figure 3: The conceptual framework. 28 Figure 4: Inflation rate and nominal exchange rate (VND/USD). 39 Figure 5: Gaps between official exchange rate and unofficial market rate. 39 Figure 6: Trading bands declared by the SBV.

40 Figure 7: Inflation and exchange rate trends in 1985 – 1992. 41 Figure 8: Official and black market exchange rate in 2008 to 2009. 44 Figure 9: Official and black market exchange rate in 2010 to 2011. 45 iv LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com Figure 10: The residual of the regression result.

51 Figure 11: The histogram of residual. 53 Figure 12: The current exchange rate misalignment of the VND. 55 Figure 13: The permanent exchange rate misalignment of the VND. 55 Figure 14: The PPP ER misalignment (against a basket of currencies).

56 Figure 15: The average current misalignment and TB from 2000 to 2009. 57 Figure 16: The average permanent misalignment and TB from 2000 to 2009. 57 Figure 17: The PPP exchange rate misalignment and TB from 2000 to 2012. 58 Figure 18: The structure of Vietnam’s export from 2006 to 2012.

59 Figure 19: Several Vietnamese major exports’ products from 2000 to 2010. 60 Figure 20: Several Vietnamese major exports’ products from 2000 to 2010. 60 Figure 21: The structure of Vietnam’s import from 2006 to 2012. 61 Figure 22: Several major imports’ commodities.

61 Figure 23: The imports of necessary machineries for export sectors. 62 Figure 24: The exports and imports of electronic products and parts. 63 Figure 25: The exports and imports of mobile products and parts. 64 Figure 26: The TB excluding the exports & imports of mobile products and parts.

64 Figure 27: The percentage change of the nominal ER and the Vietnam’s inflation. 66 Figure 28: The percentage change of the Vietnam’s nominal ER and PPP ER. 66 Figure 29: The percentage change of PPP exchange rate of several currencies. 67 v LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com Abbreviations BEER : Behavioral Equilibrium Exchange Rate ER : Exchange Rate FEER : Fundamental Equilibrium Exchange Rate GSO : General Statistics Office IFS : International Financial Statistics LIC : Low Income Country MoIT : Ministry of Industry and Trade PPP : Purchasing Power Parity REER : Real Effective Exchange Rate SBV : State Bank of Vietnam TB : Trade Balance USD : United States Dollar VND : Vietnam Dong vi LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com Abstract It is said that the exchange rate policy plays an important role in an economy.

It links the domestic economy to other foreign ones. And exchange rate misalignment is often the most interested topic of economists. Hence, the aim of this research is to (i) estimate the exchange rate misalignment and (ii) investigate its relationship with trade balance, in case of Vietnam. The equilibrium exchange rates are obtained by two methods: the relative PPP approach and the Behavioral Equilibrium Exchange Rate (BEER) model.

The misalignment of exchange rate is defined as the difference between the actual and the equilibrium exchange rate. In the BEER approach, the co-integration is used to test the long run relationship between the real effective exchange rate (REER) and several macroeconomics variables. In the PPP approach, the misalignment of exchange rate is calculated simply based on the domestic and foreign CPIs. The result from the PPP approach suggests that: (i) the VND was undervalued and slightly overvalued from 2000 to the middle of 2007; (ii) the overvaluation of VND has sharply increased from the last half of 2007 up to now.

The exchange rate misalignment from PPP approach is chosen to examine the impacts on the Vietnam’s trade balance. The conclusion is that the exchange rate misalignment does not have strong relationship with trade balance. Key words: exchange rate, misalignment of exchange rate, trade balance. vii LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com CHAPTER 1: INTRODUCTION 1.1 Introduction The purpose of this research is, first, to measure the Vietnam’s real exchange rate misalignment; second, to study its relationship on Vietnam trade balance.

The exchange rate misalignment is defined as the deviation between the equilibrium1 and actual real exchange rate. An exchange rate is named overvalued when it is higher than its equilibrium level; in the otherwise, an exchange rate is labeled undervalued when it is lower than its equilibrium level. This research presents two estimating exchange rate approaches: the relative PPP approach and the Behavioral Equilibrium Exchange Rate model. First of all, we need to quantify the real exchange rate equilibrium and calculate the misalignment of real exchange rate by using two methods above.

After that, by applying several visual graphs, we can investigate the relationship between the exchange rate misalignment and trade balance.2 Background, and problem statement 1.1 A brief history of Vietnamese exchange rate policy In 1986, Vietnamese economy had been coped with persistent concerns such as the shortage of food, skyrocketing inflation, and twin deficits. Under pressure to reform, policymakers had to make a series of action to transform the Vietnamese economy from command to market oriented. In accordance to that economic reforming process, Vietnam’s exchange rate regime also had several significant changes. Vo, Dinh, Do, Hoang, & Pham (2000) found that multiple types of exchange rate were applied before 1989.

The first official exchange rates were employed for foreign commercial transactions and non-commercial, respectively. 1 There are several different definitions of equilibrium real exchange rate. They will be reviewed specifically in next chapter. 1 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com The second rate included the compensation for export firms.

The third rate was applied separately for exchanging abroad remittances. Obviously, that system seemed to be complicated and was implemented inefficiently. Consequently, these exchange rates were merged into the unique official rate in March 1989. The official exchange rate was expressed publicly in the value of VND against USD by the State Bank of Vietnam (SBV).

The cross exchange rate between VND and the third foreign currency is determined based on the information of SBV’s official exchange rate and the rate between USD against that foreign currency. From 1989 up to now, the Vietnamese exchange rate regime has been considered as a crawling band regime. In theory, under crawling band system, the state bank declares the official exchange rate within a trading band; and it may change the value of official exchange rate and trading band according to the goals in certain periods. In case of Vietnam, the exchange rate is declared officially by the SBV with a specific trading band.

Based on that information, Vietnamese commercial banks can decide their buying and selling exchange rate. Besides two instruments above, the SBV still exercises various administrative tools to assurance its key role in the foreign exchange market. In several periods, SBV has applied fixed interbank exchange rate with very low fluctuating band (i. Therefore, numerous economists have considered that Vietnam exchange rate policy looks like fixed exchange rate regime.2 Recent Vietnam economic concerns Recently, many economists have mentioned that the Vietnam’s exchange rate is misaligned, particularly, high overvaluation.

It leads to the urgent question, that VND should be devaluated or not. However, finding the answer is a complex task since exchange rate policy is always a challenged issue. Theoretically, the exchange rate policy can affect many macroeconomics variables such as the inflation rate, trade competitiveness, stability of financial system, and foreign exchange market’s performance (Ho and McCauley, 2003). On the one hand, it is 2 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com argued that government could react against inflationary threat by using a nominal exchange rate as an anchor (Giavazzi & Pagano, 1989).

On the other hand, there are opinions that to ameliorate trade balance, the exchange rate must be devaluated enough to obtain competitiveness. As a result, import decreases, export increases and trade balance improves (Dooley, Folkerts-Landau, & Garber, 2003). The first and hottest major issue is the inflation when it has become a serious macroeconomic cyclical issue in recent years (Figure 1).