Using Economic Factors to Forecast the USD/VND Exchange Rate: Case in Vietnam
- 10.2991/aebmr.k.211119.047How to use a DOI?
- USD/VND exchange rate; factors affecting; VECM; fundamental factors; factors affecting; Vietnamese economic factor
For a long time, forecasting currency exchange rate has been playing an important role for guiding the progress of the economy. There were many theories and fundamental methods to forecast exchange rate being suggested and used. Each of them has their own advantages and limited points in determining the factors that might influence the fluctuations of the currency exchange rate.
To review the fundamental methods to forecast exchange rate has been used and suggest a method for determining factors affecting the USD/VND exchange rate
The exchange rate of USD/VND is one of the most important monetary policy instruments of Vietnam government. A significant fact is that the international exchange in Vietnam mainly uses the US dollar. Even though the author cannot find a trusted statistical data to show this, but it can be estimated that more than 80 percent of international trade transactions in Vietnam are in US dollar (Hoang Dinh Minh, 2014). It explains why SBV using USD/VND exchange rate as center exchange rate to control the Forex system. Since Vietnam joining the WTO in 2007, the market economy has been widening thanks to more international trade, which in turn attracts more attention to the USD/VND exchange rate. Despite its important role in Vietnam economy, there has not been many economic theories and development policies based on the fluctuation of the USD/VND exchange rate such as how exchange rate reflecting inflation, trade balance, export and import,… and their consequences on the overall market performance in Vietnam.
Research design, approach and method:
To test the hypothesis of “Could the gaps of inflation and interest rate between the United States and Vietnam economy explain USD/VND exchange rate better than inflation and interest rate themselves”, the study is going to compare two groups of variables. Group 1: The difference of inflation between Vietnam and U.S.A; The difference of interest between Vietnam and U.S.A; GDP of Vietnam; Balance of payment (current account) of Vietnam; Reserves of Vietnam; USD/VND exchange rate. And Group 2: Inflation of Vietnam; Interest of Vietnam; GDP of Vietnam; Balance of payment (current account) of Vietnam; Reserves of Vietnam; USD/VND exchange rate
The raw data were collected quarterly from 2005Q1 to 2017Q4, with a total of 52 observations. Then by using Vector Error Correction Model (VECM), the paper aims at finding better ways to assess the factors influence the USD/VND exchange rate. Moreover, through the analysis of Impulse Response Function, Variance Decomposition, Residual Unit Root Test, Granger Causality.. the model is check to see whether it fits or not.
Results of the research point out that the main endogenous factors (excluding exchange rate) affecting exchange rate within chosen variables is GDP, however, its role is significant only in the long-run. Whereas, in the short-run, only Interest rate factor does Granger-cause Exchange rate. And surprisingly, a shock of reverses only helps to restrain Exchange rate volatility in the short-run, but cannot help in long run, especially in the later periods of the study. This response may imply that in the long-run, Reserves should not be used as an instrument to restrain Exchange rate in Vietnam in the long-term. Additionally, other variables have long-run affecting to exchange rate in a different level of significance.
The main positive results of the paper aligns with some proven studies that the factors were chosen has long-run or short-run affecting to exchange rate. Furthermore, the paper finds that: GDP affecting Exchange rate in long-run, Interest rate influence exchange and have a positive effect in the long-run. This study will provide some implications for government in exchange rate intervention policy, as well as for other organizations such as import–export firms and commercial banks. Indeed, they can take advantages of the model to develop a tool to minimize the risk of exchange rate fluctuation.
- © 2021 The Authors. Published by Atlantis Press International B.V.
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Cite this article
TY - CONF AU - Nguyen Van DINH AU - Bui Tran Huy KHANH AU - Nguyen Thi Thuy LINH PY - 2021 DA - 2021/12/07 TI - Using Economic Factors to Forecast the USD/VND Exchange Rate: Case in Vietnam BT - Proceedings of the International Conference on Emerging Challenges: Business Transformation and Circular Economy (ICECH 2021) PB - Atlantis Press SP - 503 EP - 533 SN - 2352-5428 UR - https://doi.org/10.2991/aebmr.k.211119.047 DO - 10.2991/aebmr.k.211119.047 ID - DINH2021 ER -