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This paper employs a simple macroeconomic model of inflation to empirically investigate the determinants of CPI inflation for Vietnam over the period 2001 to 2009. Vietnam is chosen as our focus for this study because of the country's recent history of high inflation since the end of the Vietnam War in 1975 and the Adjustment of Price reforms in 1985. We are particularly interested in examining the role of the exchange rate in explaining inflation, and of the effect of supply side factors such as the prices of crude oil and rice. Using a range of time series estimation techniques, we find that inflation is persistent and that the money supply, oil prices and rice prices present the strongest influences on CPI inflation.
Keywords: Vietnam, inflation, vector autoregression.
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I. Introduction
This study examines the determinants of inflation in the Socialist Republic of Vietnam, a developing transitional economy. The adverse effects of inflation are well known, and for Vietnam, price instability has been argued to be a strong factor in stifling economic development (Tran Van Tho et al. 2000). For example, throughout the 1980s and the early 1990s, there were significant inflationary pressures in Vietnam. This peaked at 587 per cent in 1986 (Dang Phong 2008). While such hyperinflation has come under relative control, the July 2008 rate of 27 per cent was the highest in the whole of Asia (My dans 2008). More generally, the Vietnam experience is not unique in terms of price instability. An understanding of the mechanisms by which inflation is transmitted through the economy is thus of importance, particularly to developing nations.
This study builds upon earlier work by Goujon (2006) to investigate the determinants of inflation in Vietnam over the period 2001-09. To our knowledge, this is one of the few comprehensive analysis of inflation using these data and methods to be conducted for Vietnam, and thus contributes to our understanding of the inflation experience of this and other developing countries. We find that, unsurprisingly, inflation is quite persistent and that the growth in the stock of money and that external factors are prominent in influencing inflation.
The remainder of the paper is as follows: The following section presents some stylized facts relating to...