TAILIEUCHUNG - Can devaluation be effective in improving the balance of payments in Vietnam

The empirical results of this paper show that there has been two-way causality between money supply growth and inflation, exchange rate and inflation, and money supply growth and exchange rate in Vietnam in the 1990s. | Journal of Policy Modeling 28 (2006) 467–476 Can devaluation be effective in improving the balance of payments in Vietnam? Nguyen Ngoc Thanh a , Kaliappa Kalirajan b,∗ b a Faculty of Economics, Vietnam National University, Hanoi, Vietnam Foundation for Advanced Studies on International Development-National Graduate Institute for Policy Studies (FASID-GRIPS) Joint Graduate Program, Tokyo, Japan Received 15 May 2005; received in revised form 5 September 2005; accepted 1 December 2005 Abstract Economists and policy makers in Vietnam have been discussing about the possibility of using devaluation to encourage exports and improve the balance of payments (BOP), while maintaining macroeconomic stability. The empirical results of this paper show that there has been two-way causality between money supply growth and inflation, exchange rate and inflation, and money supply growth and exchange rate in Vietnam in the 1990s. Both the long run and short run results of this paper suggest that devaluation can be implemented to encourage exports and to improve current account balance and BOP, and also to reduce the real exchange rate appreciation in the short run. © 2006 Society for Policy Modeling. Published by Elsevier Inc. All rights reserved. JEL classification: C32; E50 Keywords: Inflation; Exchange rate; Money supply; Vector autoregressive model; Vector error correction model 1. Introduction Understanding the links between inflation, exchange rate and money supply is imperative to conduct monetary policy, and exchange rate policy in any country. Vietnam is keen to increase its exports and to improve the balance of payments (BOP) without affecting its macroeconomic stability. Though there are several options to achieve its objective such as using tariffs and export subsidies, an option that has attracted the attention of the policymakers in Vietnam is devaluation. How effective the devaluation will be in improving the BOP by boosting exports depends on the ∗ Corresponding

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