Equilibrium Real Exchange Rate, Currency Misalignment, and Trade Performance - The Case of Vietnam: 1992-2017

Abstract

This paper is conducted to uncover the determinants of the equilibrium real exchange rate and evaluate the magnitude of exchange rate misalignment for the Vietnamese dong over the period 1992-2017 under the cointegration framework. The results of econometric analysis indicate that the Vietnamese dong was overvalued during the periods 1996-2002, 2007-2010, 2015-2017. This was due to the fact that the Vietnamese dong was rigidly kept stable while the economy experienced a persistent high inflation environment through many consecutive years in the past. The overvaluation of the Vietnamese dong apparently contributed to the deterioration of the trade account. The monetary authority allowed the currency to be largely devaluated only at the time when loss of competitiveness was clearly discerned and when there were pressures emerged from crisis periods. The findings suggest that the real exchange rate should be managed in line with its equilibrium level and any misalignment should be adjusted on time in order to maintain the country’s trade competitiveness and external equilibrium.