Three essays on the monetary policy and the exchange rate policy in Vietnam
Author: Do, Van Vinh
Under the direction of: Michaël Goujon
Clermont Auvergne University
English text
Keywords: Economy, Vietnam, Currency demand, Exchange rate, Inflation, Cointegration, Monetary policy - Vietnam, Public policy.
Abstract
The process of economic transition of Vietnam is widely known as “renovation” or "đổi mới" since 1986. It has consisted in reforms to transform the centrally planned model to a market-oriented economy. Since then, Vietnam has gained impressive results in economic performance, poverty reduction and improvement in the standard of living. The economic growth reached 7.4% per year in the 1990s and 6.2% in the 2010s. The GDP per capita has been improving from 500 USD (constant, 2015) in 1990 to 2,650 USD in 2020. The ratio of people living below the national poverty line reduced from 58% in 1993 to 6.7% in 2019. Although the economy has obtained remarkable results, many challenges remain. First, inflation is high, persistent, and volatile. Second, the level of exchange rate is usually considered as being overvalued which reduces the competitiveness of domestic goods. This thesis includes three chapters, which will focus on analyzing monetary policy and exchange rate policy in Vietnam. The State Bank of Vietnam (SBV) follows monetary aggregates target to achieve economic growth and stability in price levels. The first question is whether the appropriate monetary aggregate has been chosen. Second, the regime of managed floating that has been adopted leads to question the cause of the dynamics of the exchange rate. In chapter 1, over the 2000-2016 period, we investigate the money demand function for both the monetary aggregate of domestic currency (M2D) and the broader aggregate (M2) that includes foreign currency deposits in the banking system. The results show interesting findings. First, we find that the interest rate is not a relevant determinant in the money demand function. Second, the real money demand M2D is highly sensitive to the expected inflation rate and to the depreciation of the exchange rate. Third, the inflation rate is not affected by excess money. However, the study of M2 that include foreign currency exhibits a weak impact of the opportunity cost of holding money because the foreign currency deposits is considered as hedging assets. The Chapter 2 explores the relationship between the official and the black exchange rates over the 2000-2015 period. We develop an empirical model to test this relationship, giving insight into the way in which the SBV conducts the exchange rate policy. The result shows a relationship exists between the two exchange rates in the long run. It implies that the two exchange markets are not fully segmented. We find that only the official rate is influenced by the black market premium. It suggests that changes in the black exchange rate lead the SBV to adjust the official exchange rate to eliminate the gap between both rates in the long run. Second, the black exchange rate is not driven by deviations from the long-run relationship, implying that the black market is relatively autonomous vis-à-vis the official market. In the Chapter 3, we investigate the long-run determinants of the real effective exchange rate and the presence of a disequilibrium of the real exchange rate in Vietnam over the 1990-2016 period. We construct an empirical model to investigate the equilibrium real exchange rate based on the hypothesis of the “Balassa-Samuelson effect”. The results show that a long-run relationship exist between the real effective exchange rate, the relative productivity and trade openness. Conclusively, over the studied period, the money market is thin and underdeveloped as witnessed by the interest rates that are still administered while not being an opportunity cost of holding money in the long term. Furthermore, restrictions in the access to the official forex market and the rigidity of the official exchange rate make foreign currencies a store of value to hedge against inflation. Consequently, money and resources can be diverted from investing in economic activities, making the goals of monetary policy difficult to achieve. (...)
