Impact of basic macroeconomic factors on the exchange rate in vietnam

MINISTRY OF EDUCATION AND TRAINING STATE BANK OF VIETNAM BANKING UNIVERSITY HO CHI MINH CITY TRAN DANG BAO TRAN IMPACT OF BASIC MACROECONOMIC FACTORS ON THE EXCHANGE RATE IN VIET NAM GRADUATION DISSERTATION MAJOR: FINANCE - BANKING CODE: 7340201 HO CHI MINH CITY, 2018         MINISTRY OF EDUCATION AND TRAINING STATE BANK OF VIETNAM BANKING UNIVERSITY HO CHI MINH CITY TRAN DANG BAO TRAN IMPACT OF BASIC MACROECONOMIC FACTORS ON THE EXCHANGE RATE IN VIET NAM GRADUATION DISSERTATION MAJOR: FINANCE - BANKING CODE: 7340201 SUPERVISOR DR HA VAN DUNG HO CHI MINH CITY, 2018       I ABSTRACT This dissertation studies the impact of basic macroeconomic factors on the exchange rate in Vietnam and build regression model for estimating exchange rate Based on the quarterly data from the first quarter of 2000 to the fourth quarter of 2015 and the research variables include: exchange rates between VND and USD, economic growth (gross domestic product) , inflation (consumer price index), interest rate (deposit rate) Firstly, the thesis will explore the theory of selected variables and, at the same time, the author also learns the theory of the relationship between selected macro variables and the exchange rate The thesis also refers, using previous relevant documents, to make hypotheses about the impact direction of macro variables to exchange rates and build research model based on previous research study Secondly, the study uses matrix correlation to examine the correlation between variables Next, the thesis uses the Augmented Dickey-Fuller method to test the stationary of the time series Then, the thesis uses the VAR model to assess the impact of macro variables on the exchange rate The empirical results show that the variables that have a statistically significant effect on the explanatory variables which are the macro factors and dependent variable which is the exchange rate At the same time, the thesis also provides the direction of impact of macro factors on exchange rate through impulse response function method, the results are in the following order: economic growth has a positive impact on the exchange rate, the interest rate has the opposite effect to the exchange rate and the consumer price index has the opposite effect to the exchange rate       II DECLARATION OF AUTHENTICITY This dissertation is my own research, the results and data collection of which are true, without prior publication of content or other content that is performed by others except for the references are cited in full source in the thesis Ho Chi Minh, December, 2018 Tran Dang Bao Tran       III ACKNOWLEDGEMENT First of all, I want to send my gratitude and respect to Dr Ha Van Dung for his sharing, understandings and considerate supports to give me useful recommendations and guidances during my study Finally, best regards to my lecturers, my friends, my classmates and my beloved BUH for their sharing and supports during my Bachelor program       IV TABLE OF CONTENTS ABSTRACT I DECLARATION OF AUTHENTICITY II ACKNOWLEDGEMENT III LIST OF ABBREVIATIONS VII LIST OF TABLES VIII LIST OF FIGURE IX CHAPTER 1: INTRODUCTION 1.1 The necessity of the thesis 1.2 Research objectives 1.3 Research question 1.4 The research subject and scope of the study 1.4.1 The research subject 1.4.2 Scope of study 1.5 Research method 1.6 Research contribution .4 1.6.1 The scientific contribution 1.6.2 The practical contribution 1.7 Research structure 1.8 Chapter conclusion CHAPTER 2: THEORETICAL BACKGROUND AND OVERVIEW OF PREVIOUS RESEARCH 2.1 Theory of exchange rate 2.1.1 The concept of exchange rate 2.1.2 Types of exchange rates 2.1.2.1 Nominal exchange rate 2.1.2.2 Real exchange rate       V 2.1.2.2.1 Bilateral real exchnage rate (BRER) 2.1.2.2.2 Real effective exchange rate (REER) 2.2 Macroeconomic factors 2.2.1 Economic growth .9 2.2.2 Inflation 11 2.2.3 Interest rate 12 2.3 The relationship between the exchange rate and macroeconmic factors and previous researchs 13 2.3.1 The realtionship between the exchange rate and economic growth 13 2.3.2 The relationship between interest rate and the exchange rate 15 2.3.3 The relationship between inflation and exchange rates 17 2.4 Empirical studies 18 2.5 Chapter conclusion 26 CHAPTER 3: RESEARCH METHODOLOGY 27 3.1 Research process 27 3.2 Research data 27 3.3 Data collection .28 3.4 Research model 28 3.5 Hypothesis 30 3.6 Steps of data analysis and estimation .31 3.7 Chapter conclusion 34 CHAPTER 4: EMPIRICAL RESULTS 35 4.1 Test of stationatity 35 4.2 Matrix correlation 36 4.3 The result of VAR model .37 4.3.1 The stability of the model 40 4.3.2 Residual diagnosis 41 4.4 Granger causality test .41 4.5 Impulse response function (IRF) 42       VI 4.6 Chapter conclusion 46 CHAPTER 5: CONCLUSIONS AND RECOMMENDATIONS 47 5.1 Conclusions 47 5.2 Recommendations 48 5.3 Limitations .50 5.4 Future studies 50 REFERENCES 51 APPENDIX 53 APPENDIX 1: Research data 53 APPENDIX 2: The correlation of variables 55 APPENDIX 3: The stationary of variables 55 APPENDIX 4: Optimal delay selection results according to information standards 58 APPENDIX 5: The VAR model results 58 APPENDIX 6: Inverse Roots of AR Characteristic Polynomial 61 APPENDIX 7: Autocorrelation test of residual 61 APPENDIX 8: Granger causality test results 62 APPENDIX 9: The response of exchange rate to macroeconomic factors 63       VII LIST OF ABBREVIATIONS   ADF Augmented Dickey-Fuller BRER Bilateral Real Exchange Rate CPI Consumer Price Index EUR European's common currency FED Federal Reserve System GDP Gross Domestic Production IFS International Financial Statistics IMF International Money Fund IRF Impulse Response Function LM Lagrange Multiplier MRER Multilateral Real Exchange Rate PPP Purchasing Power Parity Q Quarter REER Real Effective Exchange Rate USD United States Dollar SBV State Bank of Vietnam VAR Vector Autoregression VND Vietnam Dong WTO World Trade Organization     VIII LIST OF TABLES Table 2.1 Summary of prior studies 23 Table 2.2 The correlation between macroeconomic factors with exchange rate 26 Table 3.1 Describe the variables in the model 28 Table 3.2 The Granger causality test hypothesis 33 Table 4.1 Test of stationarity 35 Table 4.2 Test of stationarity after taking the first difference level 36 Table 4.3 Result of matrix correlation test 36 Table 4.4 Optimal latency option for VAR model 37 Table 4.5 The result of LM test 41 Table 4.6 The result of Granger test 42       49 exchange rate and ensure the stability of the value of the Vietnamese currency, the State Bank of Vietnam should have an active and flexible, accordance with market movements, macroeconomic conditions and accordance with the target set in the economy as well as create confidence in the market to both economic growth and stable value for money Interest rate Through the results of the test, the author has evidence that when raising interest rates, the exchange rate will decrease This has many implications in the practice of monetary policy When a country's interest rate rises, investors will invest in countries with higher interest rates, resulting in higher domestic demand, lower exchange rates (the Fisher effect) With the rising domestic interest rates, the Vietnamese currency will be more value because of higher interest rates At the same time, high interest rates will attract people to hold VND, which makes dollarization of the economy reduced In addition, the Government and the SBV can use interest rate tools to attract people to hold and deposit in dong Also, the SBV needs to improve its interest rate policies and operate in a consistent and effective manner the interest rate policy instruments Inflation The results also show that inflation has an impact on the exchange rate during the study period, although this is contrary to the forecast When contact with the real situation in recent years, the author found that inflation is the opposite effect with the exchange rate is the Government has taken measures to stabilize the exchange rate to avoid the situation people flocked to hold currency As a result, inflation is rising, and overall prices in the economy are rising, which is a sign of currency devaluation Thus, the results show that the Government has done a good job of stabilizing the exchange rate and the exchange rate tends to stabilize when inflation is high Therefore, the Government's exchange rate control in this period was quite successful, however, the Government's inflation control target should be tried to stabilize the psychology of people in the coming period when the economy fluctuates Therefore,     50 the Government should strengthen control of market and prices, closely monitored domestic and foreign market developments, promptly apply measures to regulate supply and demand, stabilize the market 5.3 Limitations The author finishes this paper with several discussions on possible limitations of this study that need to be further investigated in the near future Firstly, the dissertation can not answer the question of the impact of macroeconomic factors on the exchange rate because it does not take into account other factors such as external shocks that may affect the exchange rate in Vietnam Secondly, in fact, there are many macroeconomic variables affecting exchange rates, however, the focus is on three macroeconomic factors - economic growth, inflation and interest rates The number of variables is not many so it does not reflect the impact of macro factors on the exchange rate in Vietnam Finally, the dissertation uses the VAR estimation model to produce the results but not compare with other estimation methodology was used to improve the validity of the results 5.4 Future studies The topic has partly solved the question of the impact of basic macroeconomic factors on the exchange rate in Vietnam However, there are some limitations as mentioned above Extensive research can be done as follows: - Expands the data view time The dissertation uses data from the first quarter of 2000 to the fourth quarter of 2015, however, research may use data from months to be richer - Use multiple estimation methods to compare the results to increase the firmness of the research results - Extensive research variables, not just macro fundamental variables but also other factors, the external shock of the economy to the exchange rate to answer the question of the impact of macroeconomic factors to the exchange rate in Vietnam     51 REFERENCES Vietnamese Chau Van Thanh, 2016 Ngang bang lai suat cau chuyen FED that chat tien te – tang lai suat, Working paper series, truong Dai hoc Kinh te Thanh Ho Chi Minh Dao Thanh Binh, Dr Pham Thu Ha, Hoang Dinh Minh, 2014 Moi quan he giua ty gia va lam phat: Mot so kien nghi, truy cap tai Le Phan Dieu Thao, Nguyen Tran Phuc cong su, 2015 Tai chinh quoc te, Ho Chi Minh: Nha xuat ban Phuong Dong, Ho Chi Minh Tran Ngoc Tho, Nguyn Huu Tuan, 2013 Co che truyen dan chinh sach tien te o Viet Nam tiep can theo mo hinh SVAR, Tap chi Phat trien Hoi nhap Tran Thi Hoa, Ngo Duc Tien, 2016.Tac dong cac yeu to kinh te vi mo toi ty gia truc tiep giua USD va VND, Selectedworks of SSH PeerA, pp.180-199 English Ahmad, F., Draz, M.U, Yang, S.C., 2016 Exchange rate, economic growth and foreign direct investment in emerging Asian economies: Fresh evidence from long run estimated and variance decomposition approach Ahmad, Y., Lo, M.C, Mykhaylova, O., 2013 Causes of nonlinearities in loworder models of the real exchange rate, Journal of International Economics, pp.128141 Bailiu at al, 2003 Does exchange rate policy matter for growth?, International finance, volume 6, issue 3, pp.381-414 Byrne, J.P and Jun Nagayasu, 2010 Structual breaks in the real exchange rate and real interest rate relationship, Global Finance Journal, pp.138-151 Ca’Zorzi, Hahn and Sanchez, 2007 Exchange rate pass-throught in emerging market, ECB Working Paper Series No.739, European central Bank, pp 324-244     52 Chai-anant, C., Ponsgaparn R., and Tansuwanarat K., 2008 Role of exchange rate in monetary police under inflation target: a case study of Thailand, Bank of Thailand symposium, September Chinn, M.D., 1991 Some linear and nonlinear thoughts on exchange rates, Journal of International Money and Finance, pp.214-230 Choi, I, and Park, D., 2008 Causal relation between interest rate and exchange rates in the Asian currency crisis, Jpn World Econ, pp.435-452 De Boeck J, 2000 The effect of macroeconomic "news" on exchange rates: a structural VAR approach Mimeo, University of Leuven 10 Gala, P., 2008 Real exchange rate levels and economic development: theoretical analysis and empirical evidence, Cambridge journal of economics, pp.273-288 11 Grauwe, P.D., Vansteenkiste, I., 2007 Exchange rate and fundamentals: A non-linear relationship, Wiley InterScience, pp 37-54 12 Ito, T., Krueger A O., 1999 Economic growth and real exchange rate: An overview of the Balassa-Samualson Hypothesis in Asian, vol 7, pp.109-132 13 Katarzyna Twarowska, Magdalena Kakol, 2014 Analysis of factors affecting fluctuations in the exchange rate of Polish Zloty Against Euro, pp.889-898 14 Messe, R and K Rogoff, 1988 Was it real? The exchange rate-interest differential relation over the mordern floating rate-period, Journal of Finance, pp.933948     53 APPENDIX APPENDIX 1: Research data Time Exchange rate GDP growth Interest Inflation Q1/2000 14,062.00 4.01 10.80 48.88 Q2/2000 14,085.00 4.01 10.80 48.13 Q3/2000 14,215.00 4.90 10.40 47.60 Q4/2000 14,514.00 4.00 10.20 47.90 Q1/2001 14,545.00 4.00 10.65 48.21 Q2/2001 14,845.00 4.00 9.35 47.74 Q3/2001 15,003.00 4.00 9.00 47.72 Q4/2001 15,084.00 3.86 8.68 48.01 Q1/2002 15,250.00 4.25 8.52 49.44 Q2/2002 15,321.00 4.61 8.75 49.66 Q3/2002 15,347.00 4.62 9.50 49.77 Q4/2002 15,403.00 4.02 9.48 50.15 Q1/2003 15,443.00 4.07 9.41 51.37 Q2/2003 15,499.00 4.25 9.45 51.17 Q3/2003 15,557.00 4.10 9.54 51.17 Q4/2003 15,646.00 4.08 9.52 51.17 Q1/2004 15,724.00 3.96 9.54 53.58 Q2/2004 15,723.00 3.87 9.54 55.12 Q3/2004 15,755.00 3.65 9.68 56.13 Q4/2004 15,777.00 3.89 10.13 56.54 Q1/2005 15,823.00 3.56 10.82 58.43 Q2/2005 15,857.00 4.02 11.88 59.56 Q3/2005 15,895.00 4.16 11.08 60.37 Q4/2005 15,916.00 4.25 11.33 61.35     54 Q1/2006 15,927.00 3.96 11.18 63.27 Q2/2006 15,996.00 3.97 11.18 63.96 Q3/2006 16,055.00 3.89 11.18 64.71 Q4/2006 16,054.00 3.99 11.18 65.46 Q1/2007 16,024.00 4.18 11.18 67.41 Q2/2007 16,125.00 4.29 11.18 68.67 Q3/2007 16,105.00 4.69 11.18 70.27 Q4/2007 16,114.00 4.86 11.18 72.44 Q1/2008 15,960.00 4.58 12.32 78.46 Q2/2008 16,514.00 4.69 16.64 85.50 Q3/2008 16,517.00 4.78 20.10 89.76 Q4/2008 16,977.00 4.95 14.08 89.51 Q1/2009 16,954.00 4.88 9.54 90.65 Q2/2009 16,953.00 4.08 9.57 91.23 Q3/2009 17,991.00 4.18 10.19 91.93 Q4/2009 18,941.00 4.28 10.98 93.63 Q1/2010 18,544.00 4.33 12.00 97.44 Q2/2010 18,544.00 3.78 13.44 98.95 Q3/2010 18,932.00 3.69 13.17 99.83 Q4/2010 18,932.00 3.99 13.93 103.78 Q1/2011 20,703.00 4.58 16.05 109.92 Q2/2011 20,618.00 4.98 18.02 118.12 Q3/2011 20,628.00 4.42 17.91 122.32 Q4/2011 20,828.00 4.68 15.84 124.35 Q1/2012 20,828.00 4.31 15.30 127.42 Q2/2012 20,828.00 4.76 13.87 128.24 Q3/2012 20,828.00 4.20 12.49 129.20 Q4/2012 20,828.00 4.65 12.23 133.01     55 Q1/2013 20,828.00 4.09 11.85 136.23 Q2/2013 21,036.00 4.54 10.20 136.65 Q3/2013 21,036.00 3.98 9.82 138.27 Q4/2013 21,036.00 4.43 9.63 140.87 Q1/2014 21,036.00 3.87 9.58 141.95 Q2/2014 21,246.00 4.32 8.60 143.37 Q3/2014 21,246.00 3.76 8.32 144.49 Q4/2014 21,246.00 4.21 8.16 144.77 Q1/2015 21,485.00 3.65 7.23 144.13 Q2/2015 21,673.00 4.10 7.23 144.78 Q3/2015 21,890.00 3.61 7.05 145.21 Q4/2015 21,890.00 3.62 6.96 145.50 APPENDIX 2: The correlation of variables APPENDIX 3: The stationary of variables     56     57     58 APPENDIX 4: Optimal delay selection results according to information standards APPENDIX 5: The VAR model results     59     60     61 APPENDIX 6: Inverse Roots of AR Characteristic Polynomial APPENDIX 7: Autocorrelation test of residual     62  APPENDIX 8: Granger causality test results     63 APPENDIX 9: The response of exchange rate to macroeconomic factors ... decisions and options that suitable for the economy There have been many studies on the impact of macroeconomic factors on the exchange rate, but the selection of the macroeconomic variables of the. .. the exchange rate At the same time, the thesis also provides the direction of impact of macro factors on exchange rate through impulse response function method, the results are in the following... Response of exchange rate to macroeconomic factors 43       CHAPTER 1: INTRODUCTION 1.1 The necessity of the thesis The exchange rate is defined as the number of units of domestic currency, the