The impact of international oil prices on the industrial production index in vietnam

UNIVERSITY OF ECONOMICS INSTITUTE OF SOCIAL STUDIES HO CHI MINH CITY THE HAGUE VIETNAM THE NETHERLANDS VIETNAM – NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS THE IMPACT OF INTERNATIONAL OIL PRICES ON THE INDUSTRIAL PRODUCTION INDEX IN VIETNAM BY NGUYEN THI HAU MASTER OF ARTS IN DEVELOPMENT ECONOMICS HO CHI MINH CITY, NOVEMBER 2013 The impact of international oil prices on industrial production index in Vietnam Nguyen Thi Hau_MDE16 UNIVERSITY OF ECONOMICS INSTITUTE OF SOCIAL STUDIES HO CHI MINH CITY THE HAGUE VIETNAM THE NETHERLANDS VIETNAM – NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS THE IMPACT OF INTERNATIONAL OIL PRICES ON THE INDUSTRIAL PRODUCTION INDEX IN VIETNAM A thesis submitted in partial fulfillment of the requirements for the degree of MASTER OF ARTS IN DEVELOPMENT ECONOMICS By NGUYEN THI HAU Academic Supervisor: Dr CAO HAO THI The impact of international oil prices on industrial production index in Vietnam Nguyen Thi Hau_MDE16 HO CHI MINH CITY, NOVEMBER 2013 ACKNOWLEDGEMENT This thesis could not completed without considerable and kindly mental supports from my supervisor, Dr Cao Hao Thi, who spend his valuable time to help me to find materials, books and super my schedule tightly He also responses quickly as soon as I ask for help and give comments, which partly contribute to the success of this thesis From bottom of my heart, I sincerely thank him for all This study also benefits greatly from the enthusiastic assistance of Dr Truong Dang Thuy, whom I got knowledge on econometric and suggest the suitable models for the study I would like to express my thanks for all students of MDE 16 for their unceasing assistance and encouragement and show deep gratitude to the lectures, VNP staffs, and library staffs for their helps in accumulating knowledge, accessing dataset and materials as well Last but not least, it gives my deepest grateful to my family members, husband, manager and colleagues for their dear encouragement, give favorable times and opportunities to finish the M.A course as well as the thesis I pledge to bear full responsibilities for errors, omissions and shortcomings of the study ABSTRACT This thesis focus on analyzing the impact of oil prices on the industrial production index in Vietnam Beside the impact of international oil prices, the paper also uses other variables such as real money supply, real exchange rate and structural break in order to find out the relationship between these variables and industrial production index The data of those variables is monthly data, from January 1999 to December 2011 Regarding the methodology, the linear regression model and error correction model suggested to apply for balanced data set The test results show that oil prices fluctuation have positive impact on the economic activities throughout the industrial production index in the long run Based on that, the Vietnamese economy can adjust itself to adapt with the fluctuation of the international oil prices in the long run In contrast, real money supply and real exchange rate have negative impact on the industrial production index Additionally, the economy is divided by two periods: before and after financial crisis that is represented by dummy variable However, this division cannot explain the economic activities In the short-run, there is only real money supply could be the adjusted parameter for changing of industrial production index TABLE OF CONTENTS ACKNOWLEDGEMENT ABSTRACT TABLE OF CONTENTS LIST OF FIGURES ABBREVIATIONS CHAPTER 1: INTRODUCTION 10 1.1 Problem Statement 10 1.2 Objectives of study 13 1.3 Research questions 13 1.4 Scope of the research 14 1.5 Structure of the thesis 14 CHAPTER 2: THEORETICAL AND EMPIRICAL BACKGROUND .15 2.1 Theoretical background 15 2.2 Empirical review 18 2.3 The conceptual framework 21 2.4 Variables 22 2.4.1 Dependent variable 22 2.4.2 Explanatory variables 24 CHAPTER 3: RESEARCH METHODOLOGY 31 3.1 Research process 31 3.2 Model establishment 31 3.3 Data 34 3.4 Unit root test 35 3.5 Cointegration test 35 CHAPTER 4: DATA ANALYSIS 37 4.1 Industrial production and oil prices 37 4.2 Descriptive analysis 39 4.3 Linear regression model 40 4.4 Augmented – Dickey Fuller (ADF) Test 41 4.5 Optimal lag length 41 4.6 Cointegration test 42 4.7 Error Correction Model (ECM) 42 CHAPTER 5: CONCLUSION AND POLICY IMPLICATIONS 44 5.1 Conclusion 44 5.2 Policy implications 45 REFERENCES 47 APPENDIX 52 ESTIMATED RESULTS 53 LIST OF FIGURES Figure 2.1 The relationship between increasing in oil prices and the 19 economy recessions Figure 2.2 The conceptual framework between variables 22 Figure 2.3 Economic development and energy trend in Vietnam 24 Figure 3.1 The research process 31 Figure 4.1 The trend of development of industrial production and oil 36 price in Vietnam Figure 4.2 The trend of development of real exchange rate in Vietnam 37 Figure 4.3 The trend of development of real money suppy in Vietnam 37 LIST OF TABLES Table 2.1 Summary of variables 28 Table 4.1 Summary Statistic on the sample observations 38 Table 4.2 Correlation on the sample observations 38 ABBREVIATIONS GDP: Gross Domestic Products GNP: Gross National Products CPI: Consumer Price Index VAR: Vector Autoregression ECM: Error Correction Model IPI: Industrial Production Index OIL: Oil price RM: Real Money Supply REER: Real Effective Exchange Rate IMF: International Monetary Fund ADB: Asian Development Bank CHAPTER 1: INTRODUCTION 1.1 Problem Statement It cannot be deniable the important role of the energy resource with the human life All economic activities from the smallest unit such as household to the heavy industry use power everyday and the demand for it increasing day by day and one of the most important among the energy resource is oil In the current economic context with strong level of development, oil is a very important resource for production and has the significant effect to the economic growth The world has seen the fluctuation of oil prices over the periods and confirmed that oil prices changes have strongly impact on the macroeconomic activities throughout the industrial production index The inflation and recession matters all over the world have related to oil prices changes The increase in oil prices in 1973-1974 and again in 1979 made the mass in the world economy At that time, the prices rose significantly because of strongly shortage in oil supply and high inflation expanded to other industries that made the slowdown in the economy Recent rising of oil prices is also a reason that makes the economist worry about the prospect of the international finance Additionally, the scarce of natural resource, the current reserve of oil and some conflict about oil in the Middle East are the major problems for the economic activities According to OPEC report (OPEC annual statistic bulletin, 2010-2011), more than three-quarters of the world's proven oil reserves are located in OPEC Member Countries, with the bulk of OPEC oil reserves in the Middle East, accounting for 70% of the OPEC total and OPEC's proven oil reserves currently stand at well above 1000 billion barrels (accounting for 79.6%) While the oil reserves of non-OPEC countries is about 20.41% (about 272.9 billion barrels) With the increasing continuously of exploiting and using oil, the scarce of oil resource cannot be avoidable and the oil prices hardly to fall, which have negative effect on the economic activities, in which the heavy industry is affected as well There are many researches about the relationship between oil prices changes and industrial production index Firstly, oil prices fluctuations impact not only on the Based on that, real exchange rate needs to be under control of the Government with the policy to keep the exchange rate stable for the stabilized development of the economy REFERENCES Ali Ahmed, Huson Joher & Bashar, Omar H.M.N & Wadud, Mokhtarul I.K.M (2012) "The transitory and permanent volatility of oil prices: What implications are 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predict e, resid dfuller e, lags (2) Augmented Dickey-Fuller test for unit root Number of obs = 153 Interpolated Dickey-Fuller Test 1% Critical Statistic Value 5% Critical 10% Critical Value Value -Z(t) -6.727 -3.492 -2.886 -2.576 -MacKinnon approximate p-value for Z(t) = 0.0000 Optimal lag length The optimal lag length result Selection-order criteria Sample: 1999m5 - 2011m12 Number of obs = 152 + -+ |lag | LL LR df p FPE AIC HQIC SBIC | | + | | | -102.496 000048 1.40126 1.43358 1.48083 | | | 666.371 1537.7 16 0.000 2.4e-09 | | 692.487 52.231* 16 0.000 2.1e-09* -8.63799* -8.34705* -8.50489 -8.34325 | | 702.738 20.503 16 0.198 2.3e-09 -8.56235 | | 710.165 14.854 16 0.535 2.5e-09 -8.44954 -8.10701* | -7.9218 | -8.1421 -7.52786 | -7.89999 -7.09675 | + -+ Endogenous: Exogenous: lnipi lnoil lnrm lnrx _cons Cointegration test The Johansen cointegration test result Johansen tests for cointegration Trend: constant Sample: Number of obs = 154 Lags = 1999m3 - 2011m12 5% maximum trace rank parms LL 20 652.17032 27 eigenvalue critical statistic value 98.3950 47.21 682.85216 0.32865 37.0313 29.68 32 696.63159 0.16386 9.4724* 35 700.14968 0.04466 2.4363 36 701.36781 0.01570 15.41 3.76 Linear regression model The linear regression model for LNIPI, LNOIL, LNRX, LNRM Source | SS df MS Number of obs = -+ F( 151) = 9.09 Model | 14.3995965 3.59989912 Prob > F = 0.0000 Residual | 59.7899295 151 395959798 R-squared = 0.1941 Adj R-squared = 0.1727 Root MSE 62925 -+ -Total | 74.189526 155 478642103 4, 156 = -lnipi | Coef Std Err t P>|t| [95% Conf Interval] -+ -lnoil | 6563819 2142599 3.06 0.003 2330475 1.079716 lnrm | -.667353 1957398 -3.41 0.001 -1.054096 -.2806104 lnrx | -2.705908 1.133994 -2.39 0.018 -4.946452 -.4653641 d | 0587503 2490791 0.24 0.814 -.4333798 5508805 _cons | 8.334692 1.794132 4.65 0.000 4.789849 11.87954 The linear regression model for LNRX, LNOIL, LNRM reg lnrm lnrx lnoil Source | SS df MS Number of obs = -+ F( 2, 156 153) = 312.28 Model | 74.095895 37.0479475 Prob > F = 0.0000 Residual | 18.1515672 153 118637694 R-squared -+ -Total | 92.2474622 155 595144918 = 0.8032 Adj R-squared = 0.8007 Root MSE 34444 = -lnrm | Coef Std Err t P>|t| [95% Conf Interval] -+ -lnrx | 3078615 4299833 0.72 0.475 -.5416094 1.157332 lnoil | 1.267706 0520198 24.37 0.000 1.164936 1.370476 _cons | 7.299276 1995433 36.58 0.000 6.90506 7.693492 Error Correction Model The Error Correction Model, lag (2) Vector error-correction model Sample: 1999m4 - 2011m12 No of obs = 153 AIC = -7.179917 Log likelihood = 576.2636 HQIC = -6.962679 Det(Sigma_ml) 6.29e-09 SBIC = -6.645134 = Equation Parms RMSE R-sq chi2 P>chi2 -D_dlnipi 720522 0.7873 544.1602 0.0000 D_dlnoil 096875 0.2003 36.82586 0.0000 D_dlnrx 024994 0.2527 49.71513 0.0000 D_dlnrm 052081 0.1661 29.27128 0.0001 | Coef Std Err z P>|z| [95% Conf Interval] -+ -D_dlnipi | _ce1 | L1 | -1.934668 1360183 -14.22 0.000 -2.201259 -1.668077 2764543 0784388 3.52 0.000 122717 4301916 | dlnipi | LD | | dlnoil | LD | 4426225 5470324 0.81 0.418 -.6295414 1.514786 8.012001 2.118998 3.78 0.000 3.858842 12.16516 292782 1.101749 0.27 0.790 -1.866607 2.452171 8.67e-06 0582546 0.00 1.000 -.1141682 1141855 | dlnrx | LD | | dlnrm | LD | | _cons | -+ -D_dlnoil | _ce1 | L1 | -.0263719 0182878 -1.44 0.149 -.0622154 0094716 0099874 0105462 0.95 0.344 -.0106828 0306576 -.4262655 0735492 -5.80 0.000 -.5704194 -.2821117 -.0221464 284902 -0.08 0.938 -.5805441 5362514 -.0210326 1481316 -0.14 0.887 -.3113653 2693001 -.0006892 0078324 -0.09 0.930 -.0160405 014662 | dlnipi | LD | | dlnoil | LD | | dlnrx | LD | | dlnrm | LD | | _cons | -+ -D_dlnrx | _ce1 | L1 | -.0069887 0047183 -1.48 0.139 -.0162364 002259 0030538 0027209 1.12 0.262 -.0022791 0083867 0339985 0189758 1.79 0.073 -.0031934 0711903 -.4784295 073505 -6.51 0.000 -.6224967 -.3343623 | dlnipi | LD | | dlnoil | LD | | dlnrx | LD | | dlnrm | LD | 0923469 0382181 2.42 0.016 0174408 167253 | _cons | 0001136 0020208 0.06 0.955 -.0038471 0040742 -+ -D_dlnrm | _ce1 | L1 | -.0030889 0098316 -0.31 0.753 -.0223585 0161808 0048922 0056697 0.86 0.388 -.0062202 0160046 -.0449635 0395404 -1.14 0.255 -.1224613 0325343 -.4450208 1531647 -2.91 0.004 -.7452181 -.1448235 -.2565886 0796363 -3.22 0.001 -.4126728 -.1005044 0001966 0042107 0.05 0.963 -.0080563 0084495 | dlnipi | LD | | dlnoil | LD | | dlnrx | LD | | dlnrm | LD | | _cons | -Cointegrating equations Equation Parms chi2 P>chi2 _ce1 3.672984 0.2990 Identification: beta is exactly identified Johansen normalization restriction imposed -beta | Coef Std Err z P>|z| [95% Conf Interval] -+ -_ce1 | dlnipi | dlnoil | 1858828 4255929 0.44 0.662 -.648264 1.02003 dlnrx | 2.465641 2.08215 1.18 0.236 -1.615297 6.54658 dlnrm | 1.233608 8213059 1.50 0.133 -.3761225 2.843338 _cons | -.019947 ... representing for the economic activities including industrial production index Definition of the industrial production index Industrial production index is an index which details the growth of various... study The goal of the thesis is to clarify the impact of international oil prices on the industrial production index in Vietnam Specific objectives include: [1] Investigate the impact of oil prices. .. the study ABSTRACT This thesis focus on analyzing the impact of oil prices on the industrial production index in Vietnam Beside the impact of international oil prices, the paper also uses other