Exchange rate pass-through into inflation in Vietnam: evidence from VAR model

Van Anh Pham

doi:10.1108/jed-07-2019-0013

Abstract

PurposeThe purpose of this paper is to examine and analyze the exchange rate pass-through into inflation (ERPT) in Vietnam.Design/methodology/approachThe paper examines and analyzes the ERPT in Vietnam by applying vector autoregression model over the period 2008‒2018.FindingsThe key finding of the research is that from the impulse response results, the transmission of exchange rate shocks to inflation is significant in Vietnam, and this is incomplete exchange rate pass-through. Moreover, the evidence from variance decompositions argues that exchange rate is an important factor to explain the fluctuation of inflation.Originality/valueIn overall, the depreciation or appreciation of exchange rate in Vietnam will considerably impact inflation.

Highlights

After being a member of World Trade Organisation (WTO) in 2007, Vietnam has been deeply integrated into the global economy
There are two types of exchange rate pass-through: incomplete exchange rate pass-through if exchange rate pass-through is less than 1 and complete exchange rate pass-through if exchange rate pass-through is equal or greater than 1
The results show that the natural logarithm of variables ‒ denoted LOG(Y) ‒ makes the system stationary (Figure 1)

Summary

Introduction

After being a member of World Trade Organisation (WTO) in 2007, Vietnam has been deeply integrated into the global economy. The exchange rate that represents the relationship between Vietnam and the world plays an important role, as well as affects many macroeconomic factors including inflation. Quantitative studies on the exchange rate pass-through into inflation (ERPT) are scarce in Vietnam, especially during the post-WTO period. In this study, the author estimates and analyses the impact of exchange rate on inflation quantitatively in Vietnam over that time to contribute to existing literature. There are two types of exchange rate pass-through: incomplete exchange rate pass-through if exchange rate pass-through is less than 1 (exchange rate changes by 1 percent and price levels change by less than 1 percent) and complete exchange rate pass-through if exchange rate pass-through is equal or greater than 1 (exchange rate changes by 1 percent and price levels change by 1 percent or greater than 1 percent)

Objectives

Methods

Findings

Discussion

Conclusion