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Download miễn phí Macroeconomic Determinants of Vietnam’s Inflation 2000-2010: Evidence and Analysis
Contents
Policy Research Note . 5
Introduction . 10
Overview of Vietnamese Economy and Inflation Dynamics, 2000-2010 . 11
Overview of Vietnam’s economy . 11
Vietnam’s inflation dynamics with key changes in policy and economic environment . 20
Literature Review on Macroeconomic Determinants of Inflation . 27
International Research . 27
Previous Studies on Vietnam’s Inflation . 32
Analysis of Key Macroeconomic Determinants of Vietnam’s Inflation . 35
The model . 35
Data . 40
Conventional data series . 40
Less conventional data . 42
Tests . 43
Unit-root Tests . 43
Cointegration Tests . 43
Results of Vector Error Correction Model (VECM) . 44
The base line model . 44
The extended model . 46
Variance decomposition . 47
Impulse Response Functions . 48
Policy Discussion and Concluding Remarks . 48
Policy discus . 48
Concluding remarks . 51
References . 53
Appendices . 5
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supply, y is the growth rate of income and ρ capturesthe opportunity cost of holding money. Interest rate and past inflation are known to be used as a
measure for opportunity cost of holding money.
However, the monetarist approach to inflation originated from the developed world where
the financial system is well developed and there are few structural bottlenecks such as those
found in the developing world. The structuralist approach to inflation determinants identifies
rigidities that caused inflationary pressures. Such inflationary pressures in developing countries
can be caused by distorting government policies, productivity differences in different sectors of
the economy, wage hikes, inelastic supply of food, foreign exchange constraints and government
budget constraints. These rigidities lead to increase in prices and thus inflation (Akinboade et.al.
2004). The structuralists also view “real” shocks to the economy such as exogenous increase in
import prices or sudden increase in budget deficits as causes for inflation. They called them
“cost-push” factors to inflation because in essence those factors increase the cost of production,
causing upward pressure in prices of certain part of the economy. More often than not, such
factor induces an increase in money supply and thus inflation in one part spills over to the whole
economy (Greene, 1989).
In addition to the monetarist approach and the structuralist approach to inflation, the
literature on inflation dynamics and inflation determinants also comprises of a third and perhaps
simplest approach to inflation: the purchasing power parity (PPP) approach. This stems from the
Law of One Price which state that in the absent of transport and other transaction costs, the
relationship between world price and domestic price becomes
ܲ ൌ ܧܲ௪ (4)
where E is the exchange rate between domestic currency and foreign currency.
Equation (4) suggests that inflation is influenced either indirectly by higher import prices or
directly through increase domestic demand. This equation also implies that exchange rate plays a
certain role in determining price level and exchange rate pass-through need to be considered.
30
Exchange rate devaluation can directly affect domestic prices of tradable goods but also
indirectly affect the general price level if pricing decisions are affected by import costs. This is
especially true for countries which rely on import of intermediate goods for production and/or
has relatively high level of dollarization like Vietnam.
All of models suggested in the three approaches above have extensively been used, tested
empirically and criticized in more recent literature. The PPP approach is criticized for being too
simple, ignoring transaction costs (transportation costs and costs created by trade and non trade
barriers), ignoring the non-tradable sector and assuming same method of price index calculation
across countries. The evidence on the validity of PPP theory is for developing countries is mixed
with PPP theory performs better for country that are geographically closed to each other and
have strong trade relation, or in countries with high inflation that witnessed rapid exchange rate
depreciation. (See more detailed review in Akinboade et.al., 2004).
The monetarist approach is criticized for not taking into account structural rigidities and
“real” shocks (cost-push factors) which have been proved to be important in developing
countries by the structuralist approach. The structuralist approach by itself misses out many
factors on the demand side suggested by the monetarists.
Thus, efforts have been made in response to such criticisms. A typical recent study on
inflation determinants in a small open economy captures the elements of all three approaches.
Chhibber (1991), for example, models inflation as a weighted average of inflation in tradable
good, non-tradable good and controlled prices and applies it to study inflation determinants in
various African countries. Tradable good inflation was model according to PPP approach. Non-
tradable good inflation is modeled to depend on elements of both cost-push and demand-pull
inflation.
Akinboade et.al. (2004) studied the relation between inflation in South Africa and money
market, labor market and foreign exchange market. They showed that labor costs, broad money
supply had positive correlation with inflation and effective exchange rate had negative impact on
inflation in the short run. In the long run they found inflation correlated negatively with interest
rate and positively with broad money supply. They also noted that monetary authorities in South
Africa had little control over these determinants of inflation making it difficult to achieve
inflation targets.
31
Byung-Yeon Kim (2001) studied the relative impacts of monetary, labor and foreign sector
on Polish inflation for the period from 1990-1999 and showed that exchange rate and wage but
not money play an important role in determining inflation. They suggested that Polish monetary
policy was passive during the studied period.
Jongwanich and Park (2008) studied cross-country inflation determinants for nine
developing Asian countries (including Vietnam) using a hybrid model that comprise both cost-
push factors (exogenous oil and food inflation) and demand-pull factors (excess aggregate
demand, exchange rate pass-through, import prices, producer price inflation and consumer price
inflation). The authors found out that the 2007-2008 surge in Asia’s inflation was caused mainly
by excess aggregate demand and inflation expectations (demand pull) and not by the two cost-
push factors even though the surge of inflation coincided with increase in international oil and
food prices. Overheating demand and years of lax monetary policy that gave rise to widespread
inflation expectations fueled inflation in these countries.
Most of the empirical studies confirmed the important role of money factors on inflation in
the long run. In the short-run, monetary factors, past inflation, public sector deficits and
exchange rate are factors that contribute to inflationary pressures. Samples of such studies are
Chhibber (1991) on Africa’s inflation, Lim and Papi (1997) on Turkey inflation, Laryea and
Sumaila (2001) on inflation in Tanzania, Akinboade et al. (2004) on South Africa’s inflation,
Lehayda (2005) on Ukraine’s inflation and Jonguanich and Park (2008) on Asian developing
countries’ inflation.
The literature on the relationship between exchange rate and inflation, however, shows
mixed results. For example, Chhibber (1991) shows that the impact of devaluation on inflation
depends on the degree of exchange rate flexibility, openness of capital account and the level of
price controls. In addition, many studies analyze structural and cost-push factors such as
oligopoly pricing and cost pressures stemming from wage increases and devaluations. The
results are mixed as well, with some of the studies found that markup pricing alone could not
explain the causes of persistent inflation and had a relatively small impact on inflation while
others found significant impact of rising labor costs on inflation in the long-run. Examples
include Lim and Papi (1997), Chhibber (1991), Akinboade et al. (2004) and Leheyda (2005).
32
Bodart (1996) explored the inflation implications of exchange rate reforms in a small open
economy by combining fiscal view of inflation with multiple exchange rate systems. He found
that a fixed crawl of the official ER has only temporary effects on inflation while a depreciation
has more permanent impact on inflation under a system of continuous adjustment of the official
rate towards the parallel market rate. Also, long-run increase in fiscal deficit leads to
permanently higher inflation.
Ito and Sato (2006) studied the exchange rate pass-through in post-crisis Asian countries and
show that though the pass-through to import prices was quite high, such pass-through to CPI was
rather low (with the exception of Indonesia) and that exchange rate pass-through to CPI was the
main reason for Indonesian inflation and nominal depreciation after the Asian crisis.
Previous Studies on Vietnam’s Inflation
Various attempts have been made to explain inflation dynamics in Vietnam. These studies
range from non-quantitative (non-technical) to extensive empirical works. For the purpose of this
study, we will focus mainly on reviewing the recent empirical works that have been done about
the case of Vietnam.
Following the economic theories set forth in the literature on inflation, studies on Vietnam’s
inflation also incorporate as many factors as possible from both ...