Determinants of inflation in vietnam during the post liberalization period (1986 2015) m a

DETERMINANTS OF INFLATION IN VIETNAM DURING THE POST LIBERALIZATION PERIOD (1986-2015) By Nguyen Thi Nhu Quynh A dissertation submitted to the University of Colombo in partial fulfillment of requirement of the degree of Masters in Economics 2015 Department of Economics Faculty of Arts University of Colombo April, 2017 DECLARATION I, Nguyen Thi Nhu Quynh, declare that the Masters in Economics dissertation entitled “DETERMINANTS OF INFLATION IN VIETNAM DURING THE POST LIBERALIZATION PERIOD (1986 – 2015)” is not less than 30,000 words in length and it carries exclusive of tables, figures, appendices, references, footnotes and appendixes This dissertation contains no material that has been submitted previously, in whole or in part, for the award of any other academic degree or diploma Except where otherwise indicated, this dissertation is my own work ………… Date: Nguyen Thi Nhu Quynh 2015/ME/28 I confirm that I have seen the final draft of the dissertation by the above named student and I believe the dissertation to be the sole work of the candidate and in a suitable form for examination …………………… Date Dr UP.P Serasinghe Senior Lecturer, Department of Economics University of Colombo i DEDICATION To my family who gives me the warmest loving in my life! ii ACKNOWNLEDGMENTS First of all, I would like to express my deep gratitude to my supervisor Dr Prasad Serasinghe whose guidance and encouragement to my efforts are vital to the research His advises and invaluable comments from time to time to make the research fulfilled And the big thanks to Dr Priyanga Dunusinghe whose guidance in statistics method to complete my research successfully He provided more encouragement, ideas, and opportunities than I ever expect My sincere thanks go to the Government of Sri Lanka and Government of Vietnam who granted me scholarship to attend at University of Colombo to complete Master degree in Economics I would like to express my sincere thanks to my friends, relatives and colleagues whose faithful co-operation and moral supports extended to me to complete my studies I would also like to express my thanks to those who helped me by providing data and gave me their valuable time to fulfill this research My deep gratitude and thanks come to my beloved parents and my brother who bring me up and constantly support me in my education iii ABSTRACT One of the most important problems of any economy is the inflation problem; understand the nature of inflation in the economy to help the country maintain stability and sustainable development Vietnam has experienced hyperinflation period immediately after liberalization (1986) and have experience in the control of inflation Since the end of year 2007, inflation in Vietnam was in a buoyant, although inflation is not so serious in this time period, but it is necessary to study the factors decisions of Vietnam inflation during the post liberalization period to understand what was happening in the economy and new assumptions in the next stage This research studies the determination of inflation in Vietnam during the post liberalization period 1986-2015 Conventional notions suggest that money supply give rise to inflation, which monetary policy on its own is powerless to prevent Understanding the nature of inflation in the economy helps for stabilization and sustainable development By looking at the impact of the determinants of inflation, this research raises a concern about the ability of the inevitable upward trend of inflation in the economy of Vietnam; the research examines the issue in the case of Vietnam using Johansen co-integration analysis The empirical results suggest that in the long-run inflation is related to money supply, and money supply has impact on inflation Hence, the government should apply practical solutions to curb inflation down to a figure as desired Keywords: Inflation, determinants of inflation, money supply, co-integration, Vietnam iv MAIN CONTENTS Page DECLARATION i DEDICATION ii ACKNOWNLEDGMENTS iii ABSTRACT iv LIST OF TABLES viii LIST OF FIGURES ix ABBREVIATIONS x CHAPTER ONE INTRODUCTION 1.1 Background .1 1.2 Research Problem .3 1.2.1 Problem Statement 1.2.2 Problem Justification .4 1.3 Research Questions 1.4 Research Objectives 1.4.1 General Objective 1.4.2 Specific Objectives 1.5 Limitations 1.6 Structure Of The Thesis CHAPTER TWO THEORETICAL BACKGROUND AND LITERATURE REVIEW 2.1 Introduction .8 2.2 Theoretical Background 2.2.1 Demand-pull Inflation 2.2.2 Cost-push Inflation 11 v 2.2.3 Market Power Theory of Inflation 12 2.2.4 Okun’s Law 13 2.2.5 Phillips Curve .14 2.3 The Relationship between Inflation and Other Factors 16 2.3.1 Money Supply and Inflation 16 2.3.2 Inflation and Exchange Rates 17 2.3.3 Interest Rates and Inflation 17 2.3.4 Inflation and Government Spending 18 2.4 Empirical Evidence 19 2.4.1 Evidence from Vietnam 19 2.4.2 Evidence from other countries .22 2.5 Summary 24 CHAPTER THREE ECONOMIC PERFORMANCE IN VIETNAM DURING 1986 - 2015 3.1 Introduction .26 3.2 Trends in Inflation 26 3.3 Trends in Public Expenditure 28 3.4 Trends in Exchange Rate 31 3.5 Trends in Balance of Trade .31 3.6 Inflation in Vietnam during The Post Liberalization Period 34 3.6.1 Inflation during 1986 – 1989 34 3.6.2 Inflation during 1990 – 2007 39 3.6.3 Inflation during 2008 – 2015 44 3.7 Relationship between Unemployment and Inflation .49 3.8 Summary 51 CHAPTER FOUR RESEARCH METHODOLOGY 4.1 Introduction .52 4.2 Data Collection and Sources 52 vi 4.3 Data Analysis Method 52 4.3.1 Description Data Analysis .52 4.3.2 Regression Analysis .53 4.3.3 Specify the Regression Framework .54 4.3.4 Data and Data Transformation .56 4.4 Summary 57 CHAPTER FIVE RESULTS AND DISCUSSION 5.1 Introduction .58 5.2 Trends in Inflation 58 5.3 Trend in Money Supply and GDP 61 5.3.1 Money Supply 61 5.3.2 GDP 64 5.4 Estimation and Interpretation of Results .67 5.5 Discussion .73 CHAPTER SIX CONCLUSION 6.1 Introduction .75 6.2 Conclusion 75 6.2 Policy Implication 77 APPENDIX 80 REFERENCES .92 vii LIST OF TABLES Table Page Table 3.3.1 Selected Indicators: Government Expenditure (1996 – 2007) (unit %) 29 Table 3.3.2 ICOR calculated at constant price in 1994 .30 Table 3.5 Export and Import index (Previous Year = 100) 32 Table 3.6.1 GDP and Inflation in first quarter period 2007 – 2007 (unit %) .36 Table 3.6.2 Vietnam’s inflation in comparison to developing Asia countries in ASEAN, the period 1990 – 2007 42 Table 3.6.3 CPI during 2011 – 2015 in Vietnam 46 Table 5.4.1 Augmented Dickey–Fuller (ADF) Unit Root Tests 67 Table 5.4.2 Augmented Dickey–Fuller (ADF) Unit Root Tests on Residual 68 Table 5.4.3 Co-integration Test Based on Johansen’s Maximum Likelihood .69 Table 5.4.4 Vector Error Correction Estimates 71 Table 5.4.5 Pairwise Granger Causality Tests .72 viii LIST OF FIGURES Figure Page Figure 3.6.1 Inflation and GDP in Vietnam during the period 1986 – 1989 .38 Figure 3.6.2 Inflation and GDP in Vietnam during the period 1990 – 2007 .41 Figure 3.6.3 Inflation and GDP in Vietnam during the period 2008 – 2015 .45 Figure 3.7 2014) Relationship between unemployment rate and inflation rate (2000 – (unit %) 50 Figure 5.2 Trend of Inflation in Vietnam during(1986 –2015) (unit %) 59 Figure 5.3.1 Money supply M2 (USD billion) 63 Figure 5.3.2 GDP (USD billion) 66 ix Appendix A6: Johansen Co-integration Test 85 Appendix A7: Augmented Dickey – Fuller Unit Root Test on D(DLCPI) 86 Appendix A8: Augmented Dickey – Fuller Unit Root Test on D(DLM) 87 Appendix A9: Augmented Dickey – Fuller Unit Root Test on D(DLG) 88 Appendix A10: Augmented Dickey – Fuller Unit Root Test on DRESIDUAL 89 Appendix A11: Vector Error Correction Estimates 90 Appendix A12: Pairwise Granger Causality Tests 91 REFERENCES Abel, Andrew B and Bernake, Ben S (2006) Update 2005-2006 Macroeconomics 5th Edition USA: Pearson/Addison-Wesley (5th ed.) 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Inflation in Vietnam during the period February 1996 to April 2005 was analyzed by Camen (2006) The impact of a number of determinants of inflation and the role of monetary factors are the main... no causal link was found between the balance of payments and inflation Similarly, the impact of investment, grows at a rapid pace during this period, inflation is not a clear and significant Inflation