macroeconomics project vietnam exchange rate

Nominal exchange rate Real exchange rateThe nominal exchange rate is the rateyou find at banks and money changers, and the rate at which you can exchange foreign currency for your local

MACROECONOMICS PROJECT

Group 3Topic: Vietnam Exchange Rate

Course: Macroeconomics - INE1051 Lecturer: Nghiêm Xuân Hòa Members:

1 Lê Ngọc Châm – 210702922 Phạm Thùy Dương – 200704343 Nguyễn Hà Ngân – 200705474 Hoàng Dương Hưng – 210704015 Lê Đình Hương Giang - 21070185

I.Identifying exchange rate 3

1.What is the foreign exchange market? 3

2.What is the exchange rate? 3

3.Nominal & real exchange rates 3

II.The role of exchange rates in an open economy 5

III.Factors affecting the exchange rate 5

1.The supply and demand for foreign currency 5

2.The domestic currency circulation and inflation situation 6

3.Interest rate differential between two currencies 7

4.Level of political stability and economic efficiency 7

5.The actual average export-import rates 7

IV.Exchange rate management policy and exchange rate regimes 7

1.The exchange rate policy 7

2.The exchange rate regimes 9

V.The current situation of the exchange rate in Vietnam 12

1.Vietnam's exchange rate policy 12

2.Tools to manage the exchange rate policy of the State Bank 13

3.Exchange rate movements in recent years 14

VI.Evaluation of the state bank's exchange rate management policy 16

I.IDENTIFYING EXCHANGE RATE:1 What is the foreign exchange market?

The foreign exchange market is an international money market where transactions in foreign currencies and means of payment are of value such as foreign currencies In otherwords, the foreign exchange market is the place where transactions of buying, selling andexchanging foreign currencies and international payment instruments of such value as foreign currencies take place.

By narrow definition, the foreign exchange market can also be seen as the interbank foreign currency market, as banks account for about 85% of all foreign exchange transactions.

2 What is the exchange rate?

The exchange rate is also known as the foreign exchange rate or rate This is the exchange rate between two currencies of two countries Simply put, this is the conversion of the priceof one currency into another country's currency More specifically, the amount of currency needed to buy 1 unit of another country's currency.

Eg: 1 GBP = 1,2 USD

The Vietnamese exchange rate is the ratio of the value of the Vietnamese dong to the value of a foreign currency.

Eg: 1 GBP = 28,052 VND1 USD = 23,410 VND

3 Nominal & real exchange rates:

Nominal exchange rate Real exchange rate

The nominal exchange rate is the rateyou find at banks and money changers, and the rate at which you can exchange foreign currency for your local currency or vice versa.Excluding the inflation factor.

The real exchange rate shows the ratiobetween the local price level and the foreign price level.

Including the inflation factor.

Meaningful The nominal exchange rate is thecurrency conversion rate.

The real exchange rate shows the quantity of goods and services purchased in one country that can beexchanged for goods and services ofanother country.

A high nominal exchange rate may indicate that the domestic currency can buy more foreign goods and services However, this may not be the case when the real exchange ratebetween the two is calculated.

The real exchange rate may be more useful when assessing the effect of theexchange rate on international trade than the nominal exchange rate because it shows how many times a good can be purchased abroad.

● Formula:

● Real exchange rate between the United States and other countries:

+ A price index for a U.S basket (P)+ A price index for a foreign basket (P*)

II.THE ROLE OF EXCHANGE RATES IN AN OPEN ECONOMY:❖ The significance of comparing currency purchasing power

The exchange rate is a powerful tool for calculating and comparing the value of the domestic currency versus the value of the foreign currency, the price of domestic goods versus the price of international goods, and labor productivity It will then be possible to calculate the effectiveness of foreign trade transactions, joint venture activities with foreign countries, foreign loans, and foreign economic policies government's.

❖ The exchange rate affects import and export activities

If the domestic currency depreciates (the exchange rate rises), the price of that country'sexports falls, increasing goods' competitiveness in the international market The economy earns a lot of foreign currency when the exchange rate rises, which helps to improve the trade balance and international payment balance.

❖ The exchange rate influences inflation and economic growth

When the purchasing power of the local currency falls (the exchange rate rises), the price of imported goods rises, potentially leading to inflation When the exchange rate falls (the price of the domestic currency rises), imports from other countries become less expensive Inflation has since been reduced, but this has resulted in a narrowing ofproduction and low growth.

=> It is clear that the exchange rate affects foreign economic relations, the balance of payments, economic growth, inflation, and unemployment significantly Coming up with numerous solutions to stabilize the economy will be made possible by having a thorough understanding of the workings and the function of the exchange rate.

III.FACTORS AFFECTING THE EXCHANGE RATE:

1.The supply and demand for foreign currency This is the factor that has the most

direct and powerful influence on the exchange rate's movement.

● If the supply of foreign currency exceeds the demand for foreign currency, the

exchange rate rises.

Figure 1

● If the demand of foreign currency exceeds the supply for foreign currency, the

exchange rate falls.

Figure 2

● The exchange rate will not change if supply equals demand (if supply and demand

for foreign currency are balanced).

Figure 3

2 The domestic currency circulation and inflation situation:

If domestic currency circulation is stable and well managed, the purchasing power of the local currency is stable, and inflation is unlikely to break out - this has a positive effect on the exchange rate (less volatile), but if money circulation is disrupted, inflation rises, and the purchasing power of domestic currency falls, causing the exchange rate to rise.As a result, if the inflation rates in the two countries differ, the exchange rate will remain

3 Interest rate differential between two currencies:

When the local currency rises and exceeds the foreign currency, the exchange rate rises When the foreign currency rises and exceeds the local currency, the exchange rate tends to fall.

4 Level of political stability and economic efficiency:

Foreign investors certainly want to invest in politically stable countries with strong economies A country with these characteristics will attract more investment than countrieswith higher political and economic risks.

For example, political instability can reduce investor confidence in a currency and they willmove capital into the currencies of more stable countries.

5 The actual average export-import rates:

Trade exchange rates are related to the current account and balance of payments If a country's export price growth is faster than its import price growth, the rate of trade hasimproved positively.

An increased rate of trade indicates that the demand for that country's exports is increasing,leading to an increase in export revenue, and an increase in demand for the local currency (and the value of the local currency).

If the growth rate of export prices is slower than that of imports, the value of the local currency will decrease relative to trading partners.

IV.EXCHANGE RATE MANAGEMENT POLICY AND EXCHANGE RATE REGIMES:

1 The exchange rate policy:

Exchange rate Policy can be defined as a system of tools used to influence the supply and demand of foreign currencies in the market, thus allowing the exchange rate to be adjusted for necessary objectives.

Essentially, the exchange rate policy focuses on two major problems: choosing exchangerate systems and adjusting the exchange rate.

❖ The objectives of exchange rate management policy:

In an open economy, the objectives that shape the policy are balanced internally andexternally Meanwhile, exchange rates are one of the components that can directly influence the stability, therefore, the process of shaping the exchange rate policy must directly aim for these objectives: internal and external balance.

These are the two fundamental objectives the exchange rate management policy must eventually reach However, in certain stages, the exchange rate policy will have some specific objectives, for example: Occasionally developing and maintaining a stable rate; Preserving and protecting the internal currency; Making full use of the functions of money (including the medium of exchange); Increasing the external currencies stock,…

● Internal Balancing Objective: It can be described as a state where the resources of

a nation are utilized, this can be achieved at full employment and stable prices Unexpected changes in prices can negatively affect trade credits and investments The government needs to prevent these sudden rises or drops in aggregate demand to maintain a stable, expected price Therefore, the exchange rate is considered an effective tool for the government in adjusting prices, especially in the internationalintegration trend, and economy nowadays.

● External Balancing Objective: Unlike the prior objective, the external balancing

objective can’t be easily defined, it mainly consists of the stability in the current account As a matter of fact, we are unsure whether the current account should be balanced, surplus or in shortage, we can only acknowledge that there shouldn’t be a huge surplus or shortage Depending on the economic, political, and social condition of a nation, the government must have a method of adjusting their exchange rate so that it’s suitable, effective, and particularly influences the import, export actions, and international investment.

2 The exchange rate regimes:

BTIThe exchangerate regimes

Fully floatingexchange rateregime

- The exchange rate isdetermined based on the supply-demand relationship.

- There is no centralbank or governmentintervention.

- Balance of payments.

- Maintain the independence of the monetary policy system.

- The economy is enhanced with stability.

- Speculative activity, increasedinflation and foreign debt.

- Affecting theinvestment psychology ofcustomers.

Managed floating exchange rateregime

It is the exchange rateregime in which the Central Bank intervenes to maintainthe exchange rate fluctuations in a specific region.

- The role of the CentralBank is enhanced.

- The exchange rate is stable at an appropriatelevel.

- Limit the flow ofexchange rates between countries.

- The exchange rateis adjusted to the appropriate level.

Fixed exchangerate regime

- It is the exchange rateregime in which the central banks of countries maintain a fixed price.

-The exchange rate differs only to a smallextent around the predetermined centralexchange rate.

- International trade isboosted by growth.

- Macroeconomic policies of countries aremore disciplined.

- International cooperation betweencountries is strengthened.

- Markets experience unfaircompetition.

- Devaluation of the

❖The optimal management of the exchange rate depends on:

- The economic goals of policymakers- The source of the shocks to the economy

- The structural characteristics of the economy under consideration

● De facto:

The de facto exchange rate regime can be defined as what a country's government actuallydoes in regard to its exchange rate system despite what it claims This is usually associated with a ‘fear of floating’ and is usually seen as intermediate exchange rate regimes The bipolar view is not really supported as the country's actual (de facto) exchange rate regime often differs from its de jure, or officially announced, policy, raising questions about whether the observed trend away from intermediate regimes is a fallacy The crux of the matter can be briefly put: free capital movements can be hugely beneficial if they are well- behaved but in the real world they can be perverse There is therefore a case for government action to counter this perversity This view does not however support the bipolar view which claims that the market would find its own way around them.

❖ The basis for choosing the exchange rate regime:

The choice of exchange rate regime revolves around two main issues:- The relationship between national economies and the global system.- The degree of flexibility of domestic economic policies.

● Firstly,

Exchange rate regime selection is to choose whether the system is open or closed Options for choosing an exchange rate system favor either fixed or floating exchange rates.

- A country that chooses a fixed exchange rate accepts constraints on national economic policies The country's economic policies must be consistent with maintaining a fixed exchange rate, so domestic policy making becomes exogenous and subject to exchange rate agreements.

=> From this, it can be seen that this choice is tantamount to imposing international constraints on national economic policies More broadly, choosing a fixed exchange rate regime is equivalent to choosing an open system, in which there is always an interaction between national factors and the world system.

- In contrast, the flexible exchange rate option, in principle, does not accept any constraints on domestic economic policies Whatever the impact of policies, exchange rate fluctuations will keep them in effect only within the country And accordingly, the results of foreign economic policies no matter what, adjusting theexchange rate will keep them out of the country.

=> In effect, this choice keeps national policy from being internationally bound Broadlyspeaking, choosing a flexible exchange regime separates the national economy from the international environment.

● Secondly,

We need to pay attention to the flexibility of domestic economic policies The extentto which this differs is evident between the choice of either type of exchange rateregime Since a fixed exchange rate represents a commitment to impose constraints onnational economic policies, it means that it is not possible to pursue domesticeconomic policies independently.

In contrast, a flexible exchange rate is a tool that can be used to keep the economic activities of the international system from influencing national policies It is therefore possible to pursue national policies without regard to the outside world and thus are characterized by a closed system.

● The exchange rate regime of Vietnam is managed floating exchange rate regimes.

Before 1999, the Vietnamese government applied a fixed exchange rate regime for businesses, keeping the VND exchange rate with other currencies at a stable level to facilitate export activities and limit exchange rate risks But in recent years, when the global economy is growing and the real exchange rate integration is certain to take place.Therefore, to match the current economy, Vietnam has started to apply the state-owned bank's exchange rate under a managed floating regime.

Reasons for Vietnam to apply the SBV's exchange rate under the managed floating regime: