Exchange Rate Pass-through into Vietnam's Imports : Empirical Evidence from Japanese Trade Data

This study investigates the exchange rate pass-through into Vietnam’s imports from Japanese trade data at a highly disaggregated HS-9-digit level ranging from January 1998 to December 2007. The results of the OLS estimation show that the Japanese exporters tend to fully pass-through exchange rate movements to Vietnamese importers in the machinery industry. In contrast, in the electronic industry, a low degree of exchange rate pass-through seems prevalent, possibly due to US dollar invoicing in trade between Japan and Vietnam. Whereas it is said that the US dollar is generally used in Asian trade, Vietnam’s machinery imports from Japan may be a notable exception in that Japanese exporters tend to pass-through the exchange rate changes to Vietnam’s importers most probably by invoicing in Japanese yen. This evidence may also have important implications for Vietnam’s macroeconomic policy. 1.INTRODUCTION Exchange rate pass-through has attracted a lot of attention over the last two decades. However, most of theoretical and empirical studies on exchange rate pass-through have focused on the developed countries, particularly in the United States, the Euro area, Japan and OECD countries, such as Knetter (1989), Marston (1990), Parsley (1993), Campa and Goldberg (2002), Campa and Goldberg (2005), Otani, Shiratsuka and Shirota (2005). Only a few studies have so far investigated the exchange rate pass-through of developing countries such as Asian countries. See, for instance, Parsons and Sato (2006), Takagi and Yoshida (2001), Lee (1995), Toh and Ho (2001) and Ghosh and Rajan (2009). However, there have been no studies to date that have analyzed exchange rate pass-through in Vietnam. Exchange rate pass-through into Vietnam’s imports has not been studied quantitatively. This may create difficulties for policymakers in determining the optimal monetary policy and controlling inflation effectively. Indeed, over the last two years (2007 and 2008), Vietnam has been falling into an unstable situation with an increasing inflation rate at a double-digit level (with a peak at more than 25%), and also with a substantial depreciation of the Vietnam dong vis-a-vis major currencies, particularly the Japanese yen (see figure 1). Given that inflation control was its top policy objective, the Vietnamese government implemented a tightening monetary policy from February 2008 by raising the base interest rate to 14 percent. The inflation rate started to decline from October 2008 but still remained high at a twodigit level. Macroeconomic instability still exists, such as a slower economic growth rate compared to projections and a current account deficit exceeding acceptable limits. After ten months of applying a contractionary monetary policy, the State Bank of Vietnam announced a cut in the base interest rate to 8.5 percent in December 2008. However, the impact of exchange rate changes on domestic inflation was not properly considered by the Vietnamese government in its fight with inflation. Therefore, it is necessary to have an empirical study of the exchange rate pass-through into Vietnam’s EXCHANGE RATE PASS-THROUGH INTO VIETNAM’S IMPORTS: EMPIRICAL EVIDENCE FROM JAPANESE TRADE DATA