Luận văn exchange rate and vietnam’s exchange policy during 2000 2015

Forcign exchange market in a country always contains content and nature of the international market, because a small change of the exchange rate on the international market will affect t

VIRTNAM NATIONAL UNIVERSITY, HANOI

SUPERVISOR: MSe Chu Van Hùng

STUDENT: Nguyễn Thị Nhã Yến

CONE; 11071577

COHORT:

MAJOR: Emternational Business

ACKNOWLEDGEMENT

‘This graduation project has been completed duc to the support of many people and I wish to acknowledge them herc

First of all, { would like io express my deeply thank to all the lecturers and

stafts at Intcrnational School- Vietnam National University for providing me not

only knowledge and skills, but aiso unforgettable memories for my student life,

AI] thanks and respect to my supervisor, MSc Chu Van Hung- [or his great

enthusiasm, encouragement, and guidance, since the beginning of shaping the idea

to having a full report

Finally, I express to my family for their love and encouragement, I have

neceived so much personal support from family and friends,

J bear full respousibiliry for the fidelity of the number and data and other contents of my graduation project,

Hanoi, 14" June 15, 2016

Student

TE Project's objectives

ITE, Subjects and scope of the study

‘V Structure of the report

Chapter 1; LITERATURE REVIEW

3 Simple mechanism of Supply and Demand

TIL Exchange rate policy

1 Objectives of exchange rato poli

2, Selection of Exchange rate poliey

3 Tools of exchange rate adjustment

4 Impacts of foreign exchange rate

Chapter 2: RESBARCH MBTHODOLOGY AND APPROACH

1 Rooks

2, Journals, magazines

3 Researches, Thesis, Dissertations

4 Reports and Summary from the State Bank of Vietnam, General Statistic Office, General Customs Office

Chapter 3: VIETNAM'S EXCHANGE RATE POLICY EN 2600-2015;

FINDINGS AND DISCUSSION

Chapter 4; SUGGESTIONS TO IMPROVE EFPICIENCY OF VIETNAM’S

EXCIIANGE RATE POLICY

2: Official Exchange rate and Market Exckange rate, USD/YND, Annually Average

Appendix 3: USD/VND Exchange rate ~ Monthly Average

Appendix 4: Macroeconomic Indices

Appendix 5: Foreign direct investment projects licensed in period 2000 — 2014 5E

Appendix 6: Vietnam’s Account Balance (From 2000 to 2011) 59

i CPI [ Consumer Prive Index _

_ER Exchange rate

FDI “ [Foreign direct investment

mm Foreign portfolio investment

GBP [British pound —' - "

— GDP _ Gross Domestic Product —

IMF Intemational Monetary Fund

KRW | Korean won

— IPB ¡ LienViet Post Bank

NER Nominal exchange rate

: OMO Open market operation — —

PPP Purchasing Power Parity _

[ RER | Real exchange rate - _

Lọ SRV _| State Bank of Vietnam ;

i SGD | Singapore dollar -

UK :

_ USD VND Viet Nam dong :

- Ta et Nam _—

LIST OF TABLES AND FIGURES

Table i.1: Natural Classifieation Categorles, c c.««c

Table 1.2: Bìg Mac Index - Published January 22ng, 2U15 14

Table 3.1: Adjustments of the State Bank an trading bands

'Fabke 3.2: VND Deposit rale in 2005-2012 <<

Figure 3.1; Official exchange rate and Market exchange rate

(CUSD/ VND) froma 2000 to 2009 secersecestestesereeceeeecens

Figure 3.6.: GDP Growth and Inflation rate it 2011-2014 « AS

INTRODUCTION

L The reasons fur topic selection

we rate is 2 tool of national monetary policy, operated central banks

under the cenditions of each country, in line with the specific situation in cach period The World economy is highly integrated; hence, foreign currency and forsign exchange market have quite strong impact on the volume of money in circulation Forcign exchange market in a country always contains content and nature of the international market, because a small change of the exchange rate on the international market will affect the exchange cule in the country and vice

Vietnam's Exchange rate policy during 2000-2015" to generalize the theory of

exchange rates ag well as to examine the real situation ia Vietnam

TH Project's objectives

~ To systematize the basic knowledge of exchange rate, how it is determined,

exchange rate policy, and how it influences economic factors, especially

macroeconomic elements

- To summarize and evaluate the adjustments of exchange rate policy of Vietnam

from 2000 to 2015 through examining the connection between the policy transmission and fluctuation of economic indices

Through studying thal relationship, to draw the conclusion of exchange rate

policy's objectives in near future aud lasily, propose some suggestions to achieve

those objectives

A Subjects and scape of the study

Subjects: In addition of literature review off exchane rate, this study focuses on

exchange rate regimes of Vielnam, the tools to adjust the exchange rate and the

volatility of indices, consistent with adjustments

Scope: the study only focuses on the main aspects that reflect the Vietnam’s exchange rate policy, The economic context sludied is from 2000 to 2015, divided into 3 phases

IV Methodology and dataset

Method used in: the study is combination of qualifative and quantitarive method,

mostly through secondary data Application of different methods tor each part of

the project, such as statistics, comparison, synthesize, analyze, evs?uatc and compare them with practical and personal references of relevant researches, reviews of supervisors and leading experts

V Structure of the repost

In addition to the introduction, conclusion, list of references, tables, figures and

diagrams; the main content includes 45 pages is structured into tour chapters:

~ Chapter 1: The literature review of exchange rate, exchange rate policy and its impacts on some key economic factors

-Chapter 2: Research approach and methodology

- Chapter 3: Current situation of Vietnam’s policy: management, adjustment s of policies, and the volatility of the factors, eurnplicd with adjustments

- Chapter 4: Suggestions to improve the exchange rate policy efficiency in

Chapter 1: LITERATURE REVIEW

| Exchange rate (ER} and Exchange rate regimes

Steve Suranovic (2010) defines that ER represents the number of unite of one

currency that exchanges for a unit of another while Chistopher Pass and Bryan

Lowes argues that it is the price of one country’s currency expressed in terins of another country's currency Typically, the mest accepted definition is thal ER is a conversion rate of one currency into another

1.2 Classifications of ER

ER is classified in variovs ways in order to fit with particular activities in the

economy

Base on quoted method:

> Direct quate:In most countries, foreign currency is used as a unit of

domestic currency

Example: In Vietnam, ER between the U.S dollar (USD) and

Vietnamese dong (VND) is quoted as: | USD = 20,000 VND

or 20,000 VND/ USD

ta

- dadirect quote: In the United Siate, Great Britain and Australia,

domestic currency is used as a unit of foreign currency

Example: In Great Britain, ER between the U § dollar and

British pound (GBP) is quoted as:

1.8366 USD/GBP or Rgppusp* 1.8366

Dase oa subject which determines BR:

- Official BR: Determined by central bank of each country Commercial

banks and other organizations will determine spot rate, forward rate aad swap at this rate

- Market ER: Determined by supply and demand of foreign exchange

Because many irternational business transactions take some time to be

completed, the ability to lock in a price today at which foreign currencies are

traded at future date is definitely advantageous

Rase on mean of paymeat-(Le Phuc Miah Chuyen, 2014),

Casi rate is \he rate applied to foreign currency in cash, checks, and credit cards,

Transfer vote is the exchenge rate applied to the case of for

gn

exchange payment transactions are made by bank transfer This rate is

typically lower than the cash rate as using the transfer rate should not have the eppearance of a real cash flow, thereby reducing the cost of

cash flow

Flectric EX: ‘\his is a transfer of foreign exchange rates on electricity,

Other kinds of rates are determinod on the basis of ‘this rate

Mail ER: Exchange rates that banks shall transfer foreign exchange by

mail, Mail ER is smatler than Electric ER because it has cheaper cost

of transfer compared with clectric DR In addition, slower mail transfer leads to interest arising during transfer period, which must be deducted from the rate

Check ER: the rate is determined on the basis of electric rate minus the

amount of interest generated by number of days required to transfer postal check from one country to another

Drajt ER: the exchange rate, is determined by subtracting Electric ER to generated interest from the time of purchase bank drafl until it is paid

Base on relationship between ER and inflation:

Nontinal exchange raie (NER): the price of one currency in terms of

another, I's usually expressed as the domestic price of the foreign

currency This rate excludes the correlation of buying power between

two currencies and it is used in daily transactions on Forex market, For

instance, if it casts a U.S dollar holder $1.36 to buy one euro, from a euro holder's perspective the nominal rate is 0.735.

~ Real exchange rate (RER) seeks to measure the value of a country's goods agains! those of ancther country, a group of countries, or the rest

of the world, at tae prevailing nominal cachange rate In other words,

AER has been adjusted by inflation rate between two countries, so it is

an indicator for buying power of two currencies

RER is determined by the formula: Er= E.P * ¿P

Where: Er is the real cxchange rate

F is the nominal exchange rate P* is the average price of a good in foreign country

P is the average price of the good in domestic country Luis A.V, Cato - Senior Economist in the IMF's Research, Deparment, has illustrated the relation between NER and RER by example of buying a Big Mac (the McDonald's sandwich of which a virtually idcutical version

is sald in many countries), where E«1.36, which is synonymous with it costs a U.S dollar holder $1.36 to buy one euro or you can bey the same Hig Mac with cither $1.36 or ] euro, incase NER= RER

How ebout B = 1.36 and the German price is 2.5 euros while the U.S price

is $3.40? Then (1,36) x (2.5) + 3.40 yields an BER of } But if the

Germar price were 3 curas and the U.S price $3.46, then the RER would

be 1.36 43+ 3.40 = 1.2 Luis A.V Catia, 20071

Exchange rate regimes

2.1, Definition

Exchange rate is one of the most important tools for economic policy of the government There fore cach country has its own exchange rate regime {also

known as exchange rate mechanism ot exchange rate arrangement), by which,

government {usualy through the central bank) manages its currency related tu foreign currencies and manage the foreign exchange market Exchange rate

management policy is linked closely with the monelary policy, in other words,

these policies bave interdependent relationship in many ways,

2.2, Exchange rate regime classification,

IMF De facto Classification in the 1990s iNustrated an overlap opinion with the Natural Classification developed by Reinhart and Rogoff (2004) that it is necessary to take into acccunt of actual functioning of regimes due to the Jaci that the exchange rate regime a country actually operates (its de facto repine) often differs meaningfully from its announced (or de jure) regime (Regoff, Husain et

at, 2003)

Their findings mentioned 6 main types of FR arangemene (1) peg (2) Limited

flexibility, (3) Managed float, (4) Freely floating, (3) Freely falling and (6) Unknown with 15 subcategories,

Table 1.1: Natural Classification Categories

Fine ] Coarse ~ Description

1 1 [ No separate legal tender "

2 {1 Pre amounced peg or currency board arrangement!

3 1 Pre announced horizontal band that is narrower thanor †

| equal to +/-2 percent

L 2 | Pre announced crawling peg

9 3 Pre announced crawling band that is wider than or equal

10 3 De facto crawling band that is narrower than or equal to

meh ti-3 percent, nee

il 3 Moving band that is narrower than or equal to“ /-2

percent {i.2., allows [or both appreciation and depreciation

(1) Fixed ER or pegged ER: Counizies typically apply this policy to maintain a

fixed exchange rate in a relatively long time period, which does not depend oa the volatility of the major currencies on the world foreign exchange market (hard

pegged) or fixed against either the value of another single currency, to a basket of

other currencies (composite), or to another measure of value, such as gold (soft

pegged) The effect of this mechanisin is to maintain the stability of the domestic

currency and domestic currency markcl

However, in the growing trend of globalization and interdependence between the economies and correncies, very few countries apply a fixed rale mode (only closed economies such as North Korea) (Le Quoc Phuong, 2015).

In case major currcncies have sudstantial Nuctuation, it will cause the exchange: rate to be bard pegged On the one Land, does not reflect the aciual value of the

domestic currency On the othcr hand, in international trade, the fixed rate

currency will be overvalued, which leads to curb exports and stimulate imports,

After the Bretton Woods system's collapse in Merch 1973, in 1976, Jamaica

Conference confirmed ‘that the members of the IMF could choose their own

exchange rate regime and oflicially abolished of the Gold Standard At the end of

1391, nearly 100 IMT”s members chose free- float regime mean while, most of

the rest followed managed- float arrangement

(2Free- flout: The countries applying floating cachange rate regime allow the exchange rate to fluctuate ertirely under supply - demand and buying: selling Telarionship - between the local currency and other currencies (especially the

neajor currencies) on the Forex market

rate from large fluctuation, ‘That means regulating rates, but with the tools upact

on demand — supply, according to market rules However, the possibility of intervention as well as the effectiveness of the intervention depends largely on the

potentials of the central bank (foreign exchange reserves holding) as well as the

ability of processing (suitable time and amount of foreign currency intervened),

(3): Managed float (ar dirty float): The managed floating system is equivalent to

a middle ground between the Moating system and the fixed system It is similar to

"1

free- float system in that exchange rates are allowed iy fluctuate on a daily basis

and there are no official boundaries, but resembles to fixed- float sysiem in that

government can do intervention to prevent their currencies from moving too far in

avertain direction (Madura, 2006)

Because currency rate is one of the vital elements in economy, especially for

trade balance, more and more countries want to manipulate by central bank or government’s intervention According tv Nikkei (2014), “In 2013, 82 countries and regions used this system, or 43% of all countries compared to 35% in 2009,

This means more countries now use this system than do the floating exchange mechanism, according to 2 survey of 191 countries and regions by the

International Monetary Fund

IL Exchange rate determination mechanism

1 Gold Standard

Gold standard is a monelary system ia which each currency unit can he freely

converted into fixed amounts of gald and vive versa,

Britain adopted this siandard in 1844 and il was follawed by many world leading economies by running “a pure gold standard and expressed their exchange rates

accordingly” (Mitchell,2009) The exchange rate under the gold standard is

determined by the economic difference for an ounce of gold between two

currencies As an cxample, say the Australian Pound was worth 30 grains of gold

and the USD was worth 15 grains, then the 2 USLs would he required for every

AUD in trading exchanges

The use of the gold standard would mark the first use of formalized exchange tates in history However, the system was defective since countries needed to

remain an extensive gold reserve in order to keep up with the volatile nature of

supply and demand for cuyreney Ás ú resuit, thịs syste was mainly used from

4879 to 1914 and replaced by the Breton Woods system (1944-1973)- 2 modification of fixed exchange rate system- in which, counties pegged their exchange rates relative to the U.S dollar and central banks could exchange dollar

holdings into gold at the official exchange rate of $35 per ounce; this option was

not available to firms or individuals Alt currencies pegged to the dollar thereby

had » fixed value in terms of gold (Lipsey, Richard G ,197/5)

2.-PurchasingPower Parity

Purchasing Power Parily (PPP) is an economic theory aiming to determine the

adjustments necdcd to be made in the exchange rates of two currencies to make

them at par with the purchasing power of cach other, In other words, the cost of a

similar commodity, or the same basket of goods must be equal in both cucrencies

when accounted for exchange rate, Go back to the example of Big Mac in the part

of “reul exchange rate” When account for Exuwen™ 1.36, then you can buy 1 Big Mac with 1 euro, it is synonymous with other can buy the same one with $1.36

PPP thcory is controversial because it works on the assumption of perfectly

competitive market, mwening that for an identical product, there is no

transportation cost, ue transaction cost, aad uo goveroment’s protection in tariff

as well as intervention In reality, very few gouds and market can ensue the above factors Consequently, The Economist invented Wig Mac Index as a

Ighthearted guide to whether currencies are at their “correct” level base on tke

theory of purchasing-power parity (PPP)

Table 1.2 shows the record of a Big Mac’s price converted into the U.S dollar in

10 coumtries in order to compare with its dollar price in the U.S to illustrate how

cuencies are under or overvalue

TTable 1-2: Big Mac Tndex - Pabiished Janwary 22nd, 2015

: lseat’s 5 poular eg Dollar aes Dollar 22 epliad Dollar ed

Price.” Exchange.” Prige's, * * ppp Valuation

According to this munbers, a Big Mac in Vietnam costs 60,000VND ($2.81

equivalent according to the current 21,380 rate), while the US price is $ 4.79,

which should draw the rate of 12,526.1 So, the Big Mne index shows VND being

41.41% undervalued

14

3 Simple mechanism of Supply and Demand

‘The development of international trade in parailel with a floating currency

arrangement in many countries has pushed the exchange rate is determined by the relationship between supply and demand like other commndities

The demand for currencies is derived from the demand for a couniry’s exports, and from speculators looking to make a profit on changes in currency values,

Mean while, the supply of a currency is obtained by the domestic demand for

imports For example, when the UK imports cars from Japan, it must pay in yon

(&), and to buy yen it must sell (supply) pounds The more it imports, the greater

the supply of pounds onto the foreign exchange market

rate

determined at the equilibrium

which cquatcs demaml and

If we assume the UK and France both produce goods that the other wants, they

will wish to trade with cach other However, French producers require payment in

Euros and the British producers require payments in pounds Sterling Both need

payment in their own local currency so that they can pay their own production

costs in their local currency The foreign exchange market enables both French

and British producers to exchange currencies so that trades can take place

is

Changes in exchange rates:

Changes in the value of 2 currency like Sterling reflect changes in demand and

supply On a demund and supply graph, the price of Sterling is expressed in terms

of the olher currency, such as the $US

(a)An increase in the exchange rate

tì

exchange

oe For example, an increase in

exports would shift the demand

curve for Sterling to the right

and push up the exchange rate

Originally, one pound bought

$1.50, but now buys $1.60;

415150

sito

hence its value has risen,

(b)Exvhange rates and interest rates

Changes in a country's interes! rales also affect its currency, through its impact on

the demand and supply of financial assets in the UK and abroad Por example,

higher interest rates relative to other countries makes the UK attractive the

investors, and leads to an increase in the demand for the UK’s financial asscts,

and an increase in the demand for Sterling

16

Conversely, lower interest rates ia one country relative te other countries leads to

aa increase in supply, 28 speculators sell'a currency in order to buy currencies

associated with xi

interest rates These speculative flows are called hot

money, and heve an important short-term effect on exchange rates

IL Exchange rate policy

1 Objectives of exchange rate policy

Each country chooses its own exchange rate regime, pegged or floating, but it is not the whole story abuul the exchange rate policy Exchange rate policy is @

system of tools uscd to influence the supply and demand of foreign currency in

the market which Zelps to adjust the oxchange rate in order to avbieve the

necessary econcmic goals

Basically, the exchange rate policy focuses un two major issues: the problem of

choosing exchange rates mechanism and exchenge rate adjustments

As stated by the central bank of Colombia, exchange rate policy slrutegies have

been implemented within a flexible exchange rate scheme that is governed by

intervention rules with the following objectives:

« To maintain an adequate level of intcrnational reserves that will lessen Ihe economy’s vulnerability to exterval shocks, both in the current and capital accounts

* To Hmit excessive volatility of the exchange rate in the short term, aud

* To moderate excessive appreciation or depreciation of the nominal exchange raic that could jeopardize the achievement of future intlation targets, as well as the economy’s external and financial stability

1?

2, Selection of Exebunge rate policy

Jn fact, every econurny always has its own characteristics and classifiention of exchange rate regime of IMF (in 1999, 2003 and 2009) has proved that there is

not any general criterion for sclection of exckange rate mechanism for the

economies However, to achieve internal balance target, then the selection of the optimal exchange rate regime is determined mainly revolve around the following

issues (Nguyen ‘Thi Tuyet Nga, 2012):

‘The reaction cf the exchange rate for the crisis

‘The exchange rate for fiscal policy

The exchange rate with the reality of a strong or weak currency

3 Tools of exchange rate adjustment

Discount interest rate method

This method is commonly used to adjust the cxchange rate on the market, With

this method, when the exchange rate reached an alarming tatc, the central bank must raise discount rate, making market interest rate increase, resulting in short-

term capital the market will ran into their country for higher interest income

Capital inflows will contribute to alleviate the stress of demand for foreign exchange, so the excitange rate will tend to fall, and vice versa

Open market operation (OMO)

Buying and selling foreign currency has direct impact on exchange rate There fore, it is one of the most important measures of the state to maintain the stability

of the purchasing power of national currencies The foreign currency trading is

done on the principle that changes in foreign curtency mies on the market and the

subjective nature of the statc’s intervene,

18

This interference is deliberate action due to negative consequence from

overusing ff domestic currency decreased by imbalance in the bulance of

payments (deficit), just selling of foreign cutrency makes foreiyn reserves

severely depleted as the rate of domestic price as being more serious decline,

Reverse Fund (Nguyen Thi Hanh, 2015)

Metkod 1: Use gold to establish the fund While the belance of payments deficit, the gold selling creates more forcign exchange to the balance of payment In case

of high inflow of foreign exchange, foreign currency is used to purchase gold io stabi

lize the exchange rate,

Method 2: Issuance of Treasury bonds When foreign currencies is at large

volume , this fund shall be used to buy bonds in order to limit the extent of foreign currency devaluation Conversely, in the case of running ovt of foreign

exchange, repurchasing the bonds issued will he conduct to prevent rising prices

4 impacts of foreign exchange rate

Exchange rate is an economic variahle, affecting elmost every aspect of economic

activities, but the impact on each is very different In particular, the effect of the exchange tate on import-expert activities arc fast and noticeable, therefore, in

integration and trade liberalization era, counirios always use exchange rate as first

and foremost tool to alter import and export activities

impact on trade balance

‘Trade balance of country is the difference between exports and imports Selling

goods and services abroad obtains supply of foreign exchange for the market, and

increases foreign currency in market, leads to the exchange rate fall, Conversely,

when import of goods and services, the importers need to pay for the partucrs and

19

go to buy forteian curenev on the market Lhìs action ineresses demaad for

foreign currcney and make the exchange rate rise,

Exchaage rate and trade balance do have interdependent relationship 1f domestic currency, under central bank's intervention, is adjusted to be depreciated or

appreciated, they both have effect on export and import For instance, at the beginning of 2011, depreciation of Vietnamese dong against the U.S dollar had

positive result to Vietnam’s trade balance In January 2011, Vietnam rice exports

camed US § 194 million With the new exchange rate, increase the amount of VND 269.5 billion Similarly, rubber production was 337 million dollars, the

amount increased dus ta the new exchange rate is VND 468.3 billion; fishery

production was 400 million USD, increased by the arnount of up ty VND 586 billion.(Le Vhi Kim Anh, 0.4.)

Impact on inflation

Inflation and exchange rate are closely related, When currency devaluation is greater than the depreciation of commodities, inflation will increasc Vice versa, ì currency devaluation is less than the depreciation of commodhties, inslation will

be linvited So when serious inflation, the exchange rate could limit inflation

However, an argument about the relationship between the exchange rate and inflation has uu longer fit reality, “the exchange rate control inflation, by contrast, when the exchange vate rcaches tu a certain level that mày cause the currency

crisis Excessive exchange rate appreciation could also make the disorder

economy, inflation will turn into deflation Therefore, the use of exchange ralé

policy to stabilize the currency or limit inflation should be cautious”- stated

Vietnam Banks Association (2011) An example of Mexico should be

20

investigated, in whick Mexico increased is exchange rat in œmder fo củrb inflation, but brought undesired outcome

in the early 1990s, Mexico government paid a serious attention to controlling inflation, Consequently, in the construction of the macroeconomic indicators,

inflation had always been to stay low However, while performing the inflation

target, the government did not pay attention to the rapid wage inercase Due to many reasons, including the strong wage increases, causing unpredictable high

inflatioa

The government had high expectations oe the exchange fate policy in order to achieve the objective of controlling inflation The government increased the value

of peso to 10% Because of the peso appreciation, thẻ intemationai

competitiveness of goods fell, the balance of payments deicriorated, affecting the economic growth, In 1993, Mexican economy began to stagnate, capital inflows from abroad constantly fled

In December 1994, Mexico was forced to announce 15.3% peso devaluation However, due to the adjustment of the exchange rate was too slow and the dumping margin was not large enough, so ihe effect of the dumping was limited,

causing a massive lost of foreign capilal flows At the end of 1994, the peso

devaluated 40% Consumer price index soared; the CPI in 1994 was 7% then reached to 35% in 1995, From 1994 to 1996, according to the accumulated

calculation, peso depreciated to 150% in terms of nominal rate, which led Mexico

fall into a currency crisis,

Impact on Economie Grawth

The basic formula for a nation’s GDP is that GDP= C +1+ G+ (X M) where:

2h

C = Consumption or consumer spending- normally the biggest component of an

economy

T= Capital investment by businesses and housekolds

G = Government spending

(X—M) = Exports minus impotta, or net exports,

From this equation, it is clear that the higher the value of net exports, the higher & nation’s GDP As discussed earlier, sirength of domestic currency as well as the stability of the exchange rate policy has correlation with wade balance, which turns aut to impact on GDP,

Impact on Capital Flows

Foreign capital inflows- the must noteworthy FDI - tend to be attracted by a Strong government, dynamic eccnomy ead stable monctary policy A uation needs to have a relatively stable currency to attract investment capital from

foreign investois

FID is the critical source of funding and greatly preferred by government due to

its sustainability and contribution to a nation’s growth The impact of exchange

rate on FDI is demonstrated through the reports of the Federal Reserve (Hed) (2006), Alba (2007) and Klein Eric Rosengren (1994} and also examined in

Vietnam’s situation in the following paragraphs

In addition to TDI, the foreign exchanye sent by the overseas plays smportant role

in capital flow, especialfy in developing countries Exchange rale fluctuation and

interest rate adjustment directly change this flow

22

Impact on Interest rate

The exchange rate level is a key consideration tor mast centeal banks when

setting monetary policy For example, former Bank of Canada Governor Mark

Carney said in a September 2012 speech that the bank takes the exchange rate of

the Cenadian dattar into account in sciting monetary policy Camey said that the

persislent strength of the Canadian dollar was one of the reasons why Canada’s monetary policy bad been “exceptionally accommodative" for so long,

Qavestdpedia,2016)

The relationship between exchange cale and interest rate is mutually connected, The part of “Exchange rate determination mechanism” has mentioned how interest rate influences exchange rate Change in interest rate leads tw change in demand of either domestic or foreign currency, making exchange rate change Conversely, exchange rate does have impact on interest rate When foreign

currency rises, to create equilibrinm in the foreign exchange market, the central

bank will proactively raise the interest rate of domestic currency hy promoting the supply of forcign currencies into the economy at the same time withdraw some of the domestic currency from the market This makes ihe foreign exchange demand

and supply become balanced,

A sttong domestic currency creates a Gtag to the cconomy, accomplishing the same result as more tightly monetary policy (ic interest rate), Morcover, this

Tesonance mey compound the issue by pulling in more hot cash from outside

speculators, who are looking for higher yielding ventures (which would assist push up the focal money)

Chapter 2: RESEARCH METHODOLOGY AND

APPROACH

Following Chapter 1; Literature review with the background knowledge of exchatige rate and exchange rate policy, this chapter discusses the details of

research methodology and strategy, data collection and analysis to address the

research objeciives of having ar overview of exchange rate as well as exploring

Vietnam's exchange rate policy to see how exchange rate adjustments affect

some macroeconomic indices,

J Research philosophy

The research philosophy for this research is pragmatism Pragmatisim research

philosophy handles with actual facts In choosing research philosophy, research question is the key determinant Practical outcomes are considered important in

this research philosophy This project handles with actual facts in exchange rate

and cxchange rate policy and Vietnam's situation in particular Practical

outcomes on Vietuam's cachange rate policy and its impacts are important part of this research

I Rescarch approach

Roscarvlt upproach is the “overall configuration of a piece of research involving

questions about what kind of evidence is gathered and from where, and how such evidence is interpreted” (Saunders et al., 2009) Therefore, research approach is

importan| in order to provide good answers ta the research questions

‘This project's nature is exploratory and descriptive The research approach of this

research is inductive ‘To understand the impact of exchange rate in Victnam, data

of macroeconomic indices is collected and examined to determine the connection between those elements and exchange rate policy,

24

IIT, Researeh design

The rescarchcr designed the research in the following steps,

a Determine research objectives and researek question,

b Review secondary sources of data, Select appropriate approach for the

collection of data

‘c Determine research strategy, research method

d Collect data

e, Analyse and interpret the data

£ Evaluate and Give recommendations

Research method

This project adopted qualitative data collection techniques and analysis Qualilative research was described as “can be construed as a research strategy

that usually emphasizes words rather than quantification in the collection acd

analysis of data and thal: predominantly emphasizes an inductive approach to the

relationship between theory and research, in which the emphasis is placed on the

generation of theories; has rejected the practices and norms of the natural

the ways in which individuals interpret their social world; and embodies a view of

sovial reality as a constently shifting emergent property of individuals’ creation”,

according to Bryman and Bell (2007)

For not using quantitative method is one af the limitations of this project, Due to

the Himited time and difficulty in collecting data, researcher was not able to quantitatively dissect on each macroeconomic element, which link to exchange

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rate adjustmeut

TY Source of data

In order to achieve research objectives identified above, the researcher collects

doth primary data and sevondary data, however, secondary data accounts a

majority

1 Books

Books on finance, financial merkct and institutions, macroeconomies are valuable

source of reference and citation in the project, the content retrieved from books musily belongs to background information of exchange rate ‘Ihe literature on exchange tate Cefinition is referenced from Collins Dictionary of Business and Steve Suradovic (201()"s Policy and Theory of International Finance, Saylor Feundatian,- two of the well- known official course book of business tertis and

theories

2 Jaurnals, magazines

Reliable and updated journals, magazines, newspapers arc used as references

namely VaEccnomy.com, KinhtevaDubao magazine Extracted information from

these sources describes Vietnam's situations 4s well as expert's interview

3 Researches, Thesis, Dissertations

These sources account for 2 large proportion of the reference of this project There are many researches on exchange rate used such as PhD Thesis of

Economics, Ho Chi Minh Banking Aca6emoy ( Nguyen Thị Tuyet Nga, 2012),

tesearch on “ Solution for adjusting exchange rate"- Duy Tan University (

Neuycn THi Hanh, 2015), and many other research from foreign author such as

KileinEric Rosengren M W (1994), Goldberg L 8 (2006), ALBA J D (nd) and

50 On

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4, Reports and Sununary from the State Bank af Vietnam, General Statistic Office, General Customs Office

This study uses Slais Bank’s statistics and data retrieved from National Ciftice’s

annual, quarterly and specific reports, raw data and their websites

State Bank releases Annual Reports, which contains overview of economy yearly, especially financial market In which, mast cf the statistics related to

macrosconomic indicators are summarized Similarly, General Statistic Office

also provides all the indicators, not only ecouomie, but also social, culture and so

‘on,

3 Other sources

Some economic websites arc uscd to extract such as Nikkei.cum, Finandlife.com,

investopedia,.com Ecomonicsonline.co.uk and so on

Y Time horizon

‘The research is cross- sectional, reseatcher investigate Vietnam’s exchange rate

policy from 2000 to 2015 and its impacts on Vietnam’s economy in the same penod This study is based on events and statistics gathered for two months, from

April 10" to June 10" 2016,

VL Validity and Reliability

The research results are based on data collected within the time horizons above

and therefore valid and reliable’ for that particular time However, in respotise to volatility of the international and domestic market, Vietnam may make some

adjusiments in exchange rate policy ar amy time laer Furthermote, slatistic,

especially related to base conversion rate, may change due to being updated, or being pruned

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