Exchange Rate Pass-through into Vietnam’s Import Prices: Empirical Evidences from six Main Trading Partners’ Data

Abstract

Background and Objective: The State Bank of Vietnam (SBV) announced it would adopt the flexible exchange rate mechanism commencing Jan 4th, 2016. The exchange rate is regarded as one of the crucial issues affecting the macroeconomic stability of the economy, along with other issues such as the budget deficit, trade deficit and inflation. The objective of this paper was to investigate in greater detail than had previously been considered the degree of exchange rate pass-through (ERPT) into Vietnam’s import prices from its main trading partners. Materials and Methods: Examination of the degree of ERPT into 261 commodities at the HS 4 digit level belonging to major categories of Vietnam imports by conducting Fixed Effects Model and using monthly highly disaggregated data of Korea, Japan, EU-28, Taiwan, Thailand, Singapore and China. Results: The analysis showed that exporters tend to highly pass-through into the import prices in the categories of “Electric machinery” and “Machinery and mechanical appliances”. Besides the prevalence of the U.S. dollar in payment invoices for imports into Vietnam, Japanese Yen (JPY), Euro (EUR) and Singapore dollar (SGD) also appeared in the bill of commodities imported from Japan, EU-28 and Singapore. Conclusion: This paper supported the decision of the SBV in moving toward a more flexible exchange rate regime allowing the daily reference rate based on a weighted average of Vietnamese dong prices in the interbank market in the previous day's trading against prices of major foreign currencies. However, the VND should only be anchored to a basket of 5 currencies, namely USD, JPY, CNY, EUR and SGD, rather than the 8 currencies announced by the SBV on December 31st, 2015.