The relationship between oil price fluctuation and vietnams macro economy

UNIVERSITY OF ECONOMICS HO CHI MINH CITY VIETNAM INSTITUTE OF SOCIAL STUDIES THE HAGUE THE NETHERLANDS VIETNAM - NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS THE RELATIONSHIP BETWEEN OIL PRICE FLUCTUATION AND VIETNAM’S MACRO-ECONOMY BY LE THU AN BI1"H MASTER OF AR'TS IN DEVE LOPMENT ECONOMICS HfJ CHI MINH CI"FY, June 2011 - UNIVERSITY OF ECONOMICS HO CHI MINH CITY VIETNAM INSTITU TE OF SOCIAL STUDIES THE HAGUE THE NETHERLANDS VIETNAM - NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS THE RELAJ’IONSHIP BETWEEN GIL PRICE FLUCTUATION AND VIETNAM'S MACRO-ECONOMY - A thesis submitted in partial fulfilment of the requirements foi the degree of MASTER OF ARTS IN DEVELOPMENT ECONOMICS By LE THUAN BINH Academic Supervisor DR DINH CONG KIIAI HG ’CHI MINII CI’FY, June 2911 ACKNOWLEDGEMENT Fiist of all, I would like to exprcss my deep gratitude to my supervisor, Di Dinh Cong Khai, for his encouragement and willing supports during the thesis writing process I would like to give thanks to Mr Phung I hanli Binh, who had provided sources of data and instructed econometric techniques for my thesis I wish to express my gracefulness to the Vietnam-Netherlands Programme for M.A in Development Economics which provides us chancc to access the best conditions for our study I am in debt of all staffs of the Programme for their devoted supports during the time I studied there I ant graccful to all piofessors who devoted their enthusiasm and knowledge on lectures from which v°e have benefited greatly What I have learned from these lectures not only help me have basic knowledge foi doing this thesis but also piovide ' me piofound understanding on economics particularly and life generally p‘ I owe many friends a debt of gratitude for all their encouragement I am graceful to all my classmates for their co-operations dui ing the course Last but not least, I am greatly indebted my family My parents, especially my Mom always encourage me and save all their love to me unconditionally CERTIFICATION I certify that the substance of this thesis has not been submitted for any degree and is not being currently submitted for any other degree This thesis is the result of my own independent work with the guidance of the supervisor, except where otherwise stated Other sources are acknowledged by explicit references LE THUAN BINH June, 2011 ABSTRACT The impact of oil price shocks on the macro-economy has received a great deal of attention since the 1970s Many empiiical studies found a significant positive effect between oil price shocks and consumer price index (CPI), and this higher CPI will retard GDP A key feature of this paper investigates the relationship between the world oil price and Vietnam’s macro-economy based on monthly time series dataset from 2001Q1 to 2009Q4 , using the method of inultivaiiate vector autoiegression (VAR) The findings show that the world oil price affects the cconomic growth and inflation of Vietnam significantly The results of the Granger causality test, impulse response functions, and variance decomposition analysis all showed that an increase in oil price will cause positive relationship to consumer price index, and this higher consumer price index causes negative affect on GDP TABLE OF CONTENTS CHAPTER I: INTRODUCTION 1.1.Problem Statement 1.2.Research Objectives ., 1.3.Research Questions 1.4.Research Methodology .5 1.5 Thesis Structure CHAPTER II: LITERATURE REVIEW The relationship between oil price and inflation 2.2 The relationship between oil pi ice and industrial production - 2.3 Crude oil price i:i the I\4iddle East in pc•i rod 1973-1975 2.3.2 Iranian ievolution and oil price fluctuation in 1979 2.3.3 The severe fall of oil price in 19S0s 2.3.4 Oil pricc shock in 1990 2.3.5 The downtrend of oil price in 2001 2.3.6 lllG tremendous oil piicc shock in 2007-2008 2.4 How higher oil pi iccs affect the global economy 2.4 Quantifying the impact of oil pricc in OEt?fi count:ies 11 2.4.2 Quantifying the impact of oil pricc in developing countries 13 2.5 Why oil seems to be niatter to the macro-ec‹iiioiny .15 2.6 Empirical studies 19 CHAPTER III: RESEARCH METHODOLOGY 3.1 Methodology - Econometric techniques 27 3.1.1 Stationaiy and Unit-root tests 27 3.1.2 Granger Causality T