In Search of Balance between Economic Growth and Inflation in Vietnam

Abstract

We define the balance point between economic growth and inflation as the maximum economic growth rate, given that the inflation rate is lower than one value. In the Vietnamese economy, multiple balance points exist. In one balance point, the economic growth is 8.02% given the inflation is below 4%, while in another point, the economic growth is 7.70%, given the inflation is in the 7-8% range. And there is a trap embedded in the 5-6% inflation range. Either the reduction of inflation to below 4% or its increase to fall into the 7-8% range is associated with a greater economic growth rate. Thus, the balance between economic growth and inflation can be considered as a balance path rather than just one balance point. The result is robust in accounting for the role of the foreign exchange rate, as proxied by the depreciation of the domestic currency, and also robust on accounting for both the annual and quarterly data sample. Since higher inflation is harmful to economic growth with a negative correlation coefficient of -0.05 in annual sample, the objective of public policy should be placed in the combination of economic growth and inflation when the inflation rate is below 4%.