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This study examines the impact of several macroeconomic variables on the exchange rate of the Vietnamese dong (VND) to the US dollar (USD) using Ordinary Least Squares (OLS) regression analysis. The variables considered in the analysis are Inflation rate, Interest rate, Gross Domestic Product (GDP) growth rate, Foreign Direct Investment (FDI), and Broad money supply. The study uses monthly data from January 2010 to December 2021 to estimate the model. The results of the OLS regression reveal that the inflation rate and FDI have a positive and statistically significant effect on the VNDUSD exchange rate. This indicates that an increase in inflation rate and FDI leads to an appreciation of the VND against the USD. In contrast, GDP growth rate and interest rate have a negative and statistically significant impact on the exchange rate, suggesting that an increase in these variables leads to a depreciation of the VND against the USD. The broad money supply, however, is found to have an insignificant effect on the exchange rate.. The findings of this study have significant ramifications for Vietnamese
FOREIGN TRADE UNIVERSITY FACULTY OF BANKING AND FINANCE -*** MIDTERM REPORT INTERNATIONAL FINANCE FACTORS AFFECTING FOREIGN EXCHANGE RATE (USD/VND) IN VIETNAM DURING THE PERIOD OF 2010-2021 Class: TCHE404 Supervisor: Assoc Prof PhD Mai Thu Hien Group: Students: Hanoi, June 2023 International Finance TABLE OF CONTENTS ABSTRACT .5 INTRODUCTION 1.1 Study Background .6 1.2 Research Problem 1.3 Research Objectives .7 CHAPTER 2: LITERATURE REVIEW 2.1 Theoretical Review 2.2 Determinants of Exchange Rates .9 2.2.1 Inflation 2.2.2 Interest rate 2.2.3 GDP 10 2.2.4 FDI .10 2.2.5 Broad Money Supply 11 CHAPTER 3: RESEARCH METHODOLOGY .12 3.1 Model specification and research hypothesis 12 3.1.1 Econometric model specification 12 3.1.2 Research hypotheses .12 3.2 Data collection and variable description 13 CHAPTER 4: DATA ANALYSIS, RESULT AND INTERPRETATION 16 4.1 Descriptive Statistics and Interpretation for each Variables 16 4.1.1 Descriptive Statistics 16 4.1.2 Correlation matrix between variables 16 4.2 Regression model with time-series data 17 4.3 Hypothesis testing 19 4.3.1 The Overall Significance 19 International Finance 4.3.2 Statistical significance of individual coefficients 20 4.4 Model errors testing 20 4.4.1 Multicollinearity Testing 20 4.4.2 Heteroscedasticity Testing (Error Variance is Nonconstant) 21 4.4.3 The serial correlation testing .22 CHAPTER 5: RECOMMENDATIONS .24 5.1 Recommendations for Viet Nam government 24 5.2 Limitations of the study and suggestion for further research .24 CONCLUSION .26 REFERENCES 28 APPENDIX 30 International Finance LIST OF TABLES Table Expected signs of variables based on theoretical researches 12 Table Description variables 13 Table Descriptive statistics and interpretation for each variables .16 Table Correlation of each variable 16 Table 5: Result of regression model .18 Table Significance of estimated coefficients of estimators 20 Table Vif result 20 Table Robust standard errors 21 Table Result of durbin-watson tests 22 Table 10 Result of newey-west 22 International Finance ABSTRACT This study examines the impact of several macroeconomic variables on the exchange rate of the Vietnamese dong (VND) to the US dollar (USD) using Ordinary Least Squares (OLS) regression analysis The variables considered in the analysis are Inflation rate, Interest rate, Gross Domestic Product (GDP) growth rate, Foreign Direct Investment (FDI), and Broad money supply The study uses monthly data from January 2010 to December 2021 to estimate the model The results of the OLS regression reveal that the inflation rate and FDI have a positive and statistically significant effect on the VND/USD exchange rate This indicates that an increase in inflation rate and FDI leads to an appreciation of the VND against the USD In contrast, GDP growth rate and interest rate have a negative and statistically significant impact on the exchange rate, suggesting that an increase in these variables leads to a depreciation of the VND against the USD The broad money supply, however, is found to have an insignificant effect on the exchange rate The findings of this study have significant ramifications for Vietnamese policymakers, investors, and companies doing business there According to the findings, in order to keep the exchange rate stable, policymakers should concentrate on reducing inflation and interest rates Investors and businesses should also consider the impact of macroeconomic variables on exchange rate fluctuations when making investment decisions or conducting international trade International Finance INTRODUCTION 1.1 Study Background According to Pham, V.A (2019), the exchange rate plays an important role in representing the relationship between Vietnam and the world as well as affects many macroeconomic factors, including inflation As a small, developing, and export-led economy, Vietnam imports numerous intermediate goods for production before reexporting them Thus, exchange rate devaluation is crucial for Vietnam because of its impact on exports and inflation via exchange rate pass-through (ERPT) In Vietnam, an increase in the inflation rate causes the VND to appreciate against the USD Increased inflation makes the domestic currency more appealing to foreign investors, resulting in increased demand for the VND and subsequent exchange rate appreciation Interest rates are the cost of borrowing money, and they also affect the exchange rate Higher interest rates cause the VND to appreciate against the USD, making the domestic currency more appealing to foreign investors, resulting in increased demand for the VND and subsequent exchange rate appreciation GDP growth rate is the rate at which the economy is growing The VND depreciates against the USD as the GDP growth rate increases This is because higher GDP growth and FDI inflows lead to increased demand for imports, which leads to increased demand for foreign currency and a depreciation of the domestic currency Typically, an increase in FDI causes the VND to depreciate against the USD It is due to FDI inflows increasing the supply of foreign currency in the domestic market, resulting in a decrease in demand for the VND and a subsequent exchange rate depreciation Changes in the broad money supply have little effect on the exchange rate in Vietnam This is due to the fact that changes in the broad money supply have no effect on the demand for or supply of foreign currency in the domestic market International Finance 1.2 Research Problem International Finance The exchange rate is an important economic indicator in Vietnam as it reflects the value of the Vietnamese dong (VND) relative to other currencies, particularly the US dollar (USD) The exchange rate can have significant implications for Vietnam's economy and its people As in international trade, Vietnam is heavily dependent on exports, particularly in the manufacturing sector A weaker VND can make Vietnamese exports more competitive in foreign markets, leading to increased demand and higher export revenues Conversely, a stronger VND can make exports more expensive and less competitive, leading to reduced demand and lower export revenues Vietnam is also vulnerable to inflation due to its high levels of economic growth and increasing demand for goods and services A weaker VND can lead to higher inflation as imported goods become more expensive, while a stronger VND can lead to lower inflation as imported goods become cheaper When it comes to foreign investment, a weaker VND can make Vietnam a more attractive destination for foreign investment, as it reduces the cost of investing in Vietnam in terms of foreign currency Conversely, a stronger VND can make Vietnam less attractive for foreign investment, as the cost of investing in Vietnam in terms of foreign currency increases The exchange rate can also have implications for domestic consumption in Vietnam A weaker VND can increase the cost of imported goods, leading to reduced purchasing power for Vietnamese consumers Conversely, a stronger VND can make imported goods cheaper, leading to increased purchasing power for Vietnamese consumers 1.3 Research Objectives The key objective of this study is to assess and evaluate the effect of Inflation rate, Interest rates, GDP growth rate, FDI and Broad money supply on the Exchange rate of USD/ VND The specific objectives of the study were to: International Finance - Examine the effect of Inflation rate, Interest rates, GDP growth rate, FDI and Broad money supply on the Exchange rate of USD/ VND using the OLS model - Give out some recommendations for the government in order to make use of fiscal and monetary policies, as well as intervention in the foreign exchange rate - Form a base for other studies to be more complete in the future International Finance CHAPTER 2: LITERATURE REVIEW 2.1 Theoretical Review One of the key tools used by the Vietnamese government to implement its monetary policy is the USD/VND exchange rate Numerous studies have been conducted on this topic, exploring the effects exchange has on various economic factors such as inflation, trade balance, and the performance of import and export firms 2.2 Determinants of Exchange Rates 2.2.1 Inflation Inflation is the gradual increase in the prices of goods and services in an economy, leading to a decrease in the purchasing power of money It is measured by the percentage change in the consumer price index (CPI) and can be caused by various factors High inflation can have negative effects on individuals, businesses, and the economy, while low or stable inflation can promote growth and stability According to the study of Monfared and Akin (2017), there is a positive relationship between exchange rates and inflation, meaning that changes in exchange rates can have an impact on the rate of inflation in an economy Specifically, the source suggests that the contribution of exchange rates to inflation is 1.33% 2.2.2 Interest rate According to Investopedia, interest rate is the amount of money charged by a lender to a borrower for the use of money, usually expressed as a percentage of the principal amount borrowed Interest rates can vary depending on a number of factors, including the creditworthiness of the borrower, the length of the loan, and prevailing market conditions There is a significant connection between interest rate increases and exchange rate movements in the short term However, this relationship becomes less clear in the long term, with the impact of interest rates on exchange rates being less significant and less predictable While the short-term effect is statistically and economically 10 International Finance CHAPTER 4: DATA ANALYSIS, RESULT AND INTERPRETATION 4.1 Descriptive Statistics and Interpretation for each Variables 4.1.1 Descriptive Statistics In this model, we use six independent variables which are: : Inflation rate; GDP; Interest rate; FDI; Broad money supply to explain the variation in Exchange rate (USD/VND) Table Descriptive Statistics and Interpretation for each Variables Variables Observations Mean Standard Deviation Min Max Exchange rate (USD/VND) 144 21859.91 1254.207 18474 23616 Inflation 144 60.67067 466.3139 -0.978 3.977 GDP 144 1112814 509976.2 116680 2399005 Interest rate 144 5.977361 3.53939 1.11 15.45 FDI 144 2.989125 0.9577794 1.154 5.11 Broad Money Supply 144 280.3327 125.7835 105.0605 535.9741 Source: Self-synthesized from Stata 4.1.2 Correlation matrix between variables Table Correlation of each Variable 18 International Finance Exchange rate Inflatio n Interest rate GDP FDI Exchange rate 1.0000 Inflation 0.1317 1.0000 GDP 0.7016 0.0246 1.0000 Interest rate -0.7514 -0.0481 -0.6720 1.0000 FDI 0.8092 0.1045 0.8335 -0.6802 1.0000 Board Money Supply 0.8870 0.080 0.8190 -0.7905 0.8545 Board Money Supply 1.0000 Source: Self-synthesized from Stata r(ER, Inflation ) = 0.1317 > => Low correlation => Inflation positively affects the Exchange rate => Expected β1 has a positive sign r(ER, GDP) = 0.7016 > => High correlation => GDP positively affects the Exchange rate => Expected β2 has a positive sign r(ER, Interest rate) = -0.7514 < => High correlation => Interest rate negatively affects the Exchange rate => Expected β3 has a negative sign r(ER, FDI) = 0.8092 > => High correlation => FDI positively affects the Exchange rate => Expected β4 has a positive sign r(ER, Broad Money) = 0.8870 > => High correlation => Board Money positively affects the Exchange rate => Expected β5 has a positive sign Thus, the expectation of the sign inferred from the above correlation table is mostly consistent with the expectations in the theories described in Table of this study, except the government spending on health These effects will be tested in Chapter III of this study 4.2 Regression model with time-series data To test for the hypotheses, this research utilizes the following regression model to examine and test for the impact of multiple independent variables which are 19 International Finance macroeconomic indicators on the dependent variable which is “Exchange rate (USD/VND)” 𝐸𝑥𝑐ℎ𝑎𝑛𝑔𝑒 = 𝛽0 + 𝛽1𝐼𝑛𝑓𝑙𝑎𝑡𝑖𝑜𝑛 + 𝛽2 𝐺𝐷𝑃 + 𝛽3𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 + 𝛽4𝐹𝐷𝐼 + 𝛽5𝐵𝑆 + 𝐮𝑖 Table 5: Result of regression model SourceNumber SS of obs = 144 df F(5, 138) = 122.27 MS Prob > F = 0.0000 Model Residual 183517634 41426423 R-squared = 0.8158 36703526 138 Adj R-squared = 0.8092 300191.47 Root MSE = 547.9 Total 224944058 Exchange Coef 144 Std Err 1573035.3 7t P>|t| Inflation 1203603 0994984 1.21 0.228 -.0763784 3170989 GDP -.0004757 0001768 -2.69 0.008 -.0008253 -.0001262 Interest -51.37025 21.19364 -2.42 0.017 -93.27651 - 9.463994 FDI 362.9579 103.7016 3.50 0.001 157.9083 568.0075 BS 6.884457 8759073 7.86 0.000 5.152523 8.616392 _cons 19674.21 302.9805 69.94 0.000 19075.13 20273.29 [95% Conf Interval Source: Compilation by authors using STATA The regression function: 𝐸𝑥𝑐ℎ𝑎𝑛𝑔𝑒 = 19674.21 + 1203603 𝐼𝑛𝑓𝑙𝑎𝑡𝑖𝑜𝑛 − 0004757𝐺𝐷𝑃 − 51.37025 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 + 362.9579 𝐹𝐷𝐼 + 6.884457𝐵𝑆 Coefficient of determination 𝑹𝟐 = 0.8158 This indicates that 81.58% of the total variation in the dependent variable is explained by the model In other words, five independent variables (Inflation rate; GDP; Interest 20