A Test of Purchasing Power Parity Efficiency in Vietnam and Other Southeastern Asian Countries

Abstract

We have tested the existence of PPP between Vietnam and four main trading partners of Vietnam in ASEAN. With a different approach compared to existing researches in the literature, we showed existence of PPP between Vietnam and Singapore (SIN), Thailand (THA) and Philippines (PHI) but not between Vietnam and Malaysia (MAL). The PPP theory can exist or not, depending on a variety of influences. The main influence is the country's exchange rate policy. According to IMF, after the economic crisis in Thailand in 1997, other Southeastern Asian countries have changed their exchange rate policies from fixed rate with USD to floating rate (THA, PHI) or flexible rate (SIN). In the case of Malaysia, the exchange rate policy is not stable but changes from fixed rate with USD (2003) to floating rate in control (2008) and since 2012, the Malaysian central bank has controlled and announced the exchange rate daily. In the mean time, the exchange rate of Vietnam has been steadily fixed with USD. This implies that VND has not changed much compared to the other 4 currencies, but inflation in Vietnam has changed dramatically in the period of this research. Because of this, VND has been likely to be overpriced, especially when compared to MYR, VND is overpriced to 40%.