Determination of Vietnam's exchange rate and policy options.

Abstract

With monthly data from July 2004 to December 2008, the empirical study in this paper found that difference in CPI or inflation rate and interest rate gap with the US are the two main determinants of Vietnam’s exchange rate. The model was built based on the three popular approaches to exchange rate determination, which are purchasing power parity (PPP) approach, balance of payment (BOP) approach, and monetary and portfolio approach and applying the error-correction model (ECM). This paper also figured out that a multilateral exchange rate system based on a currency basket is possibly the most appropriate exchange rate regime for Vietnam in the near future.