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FUNDAMENAL DETERMINANTS OF VIETNAM’S EQUILIBRIUM REAL EFFECTIVE EXCHANGE RATE AND ITS MISALIGNMENT

Thi Thieu Dao Ha and Tuyet Trinh Pham
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Thi Thieu Dao Ha: Banking University of Hochiminh City VIETNAM
Tuyet Trinh Pham: Banking University of Hochiminh City VIETNAM

No 20, Working Papers from Development and Policies Research Center (DEPOCEN), Vietnam

Abstract: This research tries to find the degree of misalignment of VND by estimating short run and long run equilibrium effective real effective exchange rate (EREER) of VND. By using Engle-Granger (1987) two-step cointegration approach, we identify that trade openness, government expenditure, domestic credit and net foreign assets are important determinants of REER of VND. In general, the REER of VND fluctuates around its long-run equilibrium and the misalignments movement can be classified into 3 periods: in 2000-2003, VND is undervalued; in 2003-2007, VND is overvalued; and in 2007-2010, VND fluctuates dramatically in overvalued tendency. Based on our findings, we suggest some recommendations for reducing nominal and real exchange rate gap and narrowing misalignments, creating a stable exchange rate, promoting long run competitiveness of the economy and attracting the investors.

Pages: 16 pages
Date: 2012
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