Transmission of World Prices to the Domestic Market in Vietnam

During the past two decades Vietnam has witnessed increasing engagement with the world market, achieved through entry into numerous international trading agreements, altered border policies, institutional reforms, and relaxation of controls on foreign investment. These endeavors have been repaid with rapid GDP growth, expanding trade, and increasing foreign investment. High rates of inflation have also accompanied the development process at times, especially in recent years after Vietnam joined the WTO. This study explored how these two macroeconomic phenomena -- increasing world market integration and inflation -- impact domestic prices. Specifically, the degree to which the world price changes are transmitted into the domestic market and the level of sectoral inflation pass-through are investigated. Model specifications include the most basic form which only contains world price as the independent variable, level regression models with world price and inflation as independent variables, and error correction models with and without an inflation term. Three alternative model specifications were estimated to test for the effects of home goods, wages, and trade policy interventions on world price transmission. With price and tariff data from General Statistics Office of Vietnam (2009), inflation and real exchange rate data from IMF (2010), and wage data from the Economist (2010), models were estimated at three levels of sectoral aggregation for the period from 1999 to 2008.