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Fundamenal Determinants Of Vietnam’S Equilibrium Real Effective Exchange Rate And Its Misalignment

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  • Ha Thi Thieu Dao

    (Banking University of Hochiminh City VIETNAM)

  • Pham Thi Tuyet Trinh

    (Banking University of Hochiminh City 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.

Suggested Citation

  • Ha Thi Thieu Dao & Pham Thi Tuyet Trinh, 2012. "Fundamenal Determinants Of Vietnam’S Equilibrium Real Effective Exchange Rate And Its Misalignment," Working Papers 20, Development and Policies Research Center (DEPOCEN), Vietnam.
    • Handle: RePEc:dpc:wpaper:2012
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