Is Vietnam's exchange rate overvalued?

Abstract

This paper focuses on Vietnam's exchange rate whose official rate has been pegged by the State Bank against the U.S dollar since 1989 despite wider market liberalisation over this time. Whether Vietnam's official exchange rate is appropriately valued has important implications for the economy's international competitiveness, trade balance and GDP. The main aim of the paper is to assess whether the official exchange rate has been valued appropriately with reference to macroeconomic fundamentals, as proposed by the Purchasing Power Parity (PPP) and the Behavioural Equilibrium Exchange Rate (BEER) approaches to evaluating equilibrium exchange rates. Our main empirical finding based on co-integration analysis using quarterly data from 1995 to 2014 is that according to both these approaches the Vietnamese Dong was significantly overvalued for extended times, most notably due to Vietnam's relatively high inflation rate.