Abstract
As in many transition economies, Vietnam has experienced a multiple exchange rate system with three exchange rates having co-existed. This paper uses the Vector-Error-Correction model and the Granger tests to investigate the relationship between the official and black market exchange rates from January 2005 to April 2011. The results confirm a long-run relationship between the official and parallel market rates of the Vietnam dong against the U.S. dollar. The short-run dynamics of two exchange rates suggest that the official exchange rate causes the black exchange rate, but not vice versa. This conclusion is valid for both a sub-period of stability and a sub-period of vibrant fluctuations, with February 2008 as the cut-off. The findings also reject the efficiency hypothesis of the black market for foreign exchange and support the policy choice of the State Bank of Vietnam not to follow black market signals in managing official exchange rates for macroeconomic stability.
Highlights
The exchange rate system in Vietnam has experienced different episodes due to macroeconomic fluctuations and changes in exchange rate policy following the economic reforms in the late 1980s.This includes a period of free floating in early 1990s, and a pegging system during 1993–1996
A de jure “managed floating” regime was declared by the State Bank of Vietnam (SBV) in 1999, a stability of a nominal official exchange rate was observed in the sub-period of 1999–2007
Under prevalent foreign exchange controls, distorting official market exchange rates, there have been three exchange rates co-existing in Vietnam: a central or reference rate determined by the central bank, a commercial bank exchange rate in the official market, and a parallel market exchange rate
Summary
The exchange rate system in Vietnam has experienced different episodes due to macroeconomic fluctuations and changes in exchange rate policy following the economic reforms in the late 1980s. This includes a period of free floating in early 1990s, and a pegging system during 1993–1996. The theoretical foundation of the multiple exchange rate system in general, and the parallel or black foreign exchange markets, was vigorously studied in 1980s (Dornbusch 1986; Huh et al 1987; Koveos and Seifert 1985; Nowak 1984; Phillips 1988; Pinto 1988).
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