Exchange rate pass-through to inflation in Vietnam

Abstract

Many studies in Vietnam estimated Exchange Rate Pass-Through (ERPT) to inflation, but the surveyed period covered the timeframe before the country entered a member of the World Trade Organization and the occurrence of the 2008’s financial crisis. In contrast, this research approaches the topic by covering a recent timeframe from 2008 to 2019. Firstly, depending on a structural vector autoregressive model, empirical findings indicate that ERPT to inflation is incomplete and has a lower degree as compared to existing research. When the nominal effective exchange rate changes by 1%, the inflation changes up to 0.34% after 12 months, and a change of 0.22% is observed for the real effective exchange rate. Secondly, inflation is found to respond positively to the shock of oil prices, output gap, and exchange rates, though its responses to money supply and interest rate are statistically insignificant. Policy implications for Vietnam are discussed from empirical findings.