Thạc Sĩ The management of foreign exchange rate regime in a market-oriented economy.

TABLE OF CONTENTS
LIST OF TABLES. 3
LIST OF FIGURES. 3
ABBREVIATION 4
INTRODUCTION 5
1. The essential of the research. 5
2. Research Methodology. 7
3. Research scope: 8
4. Research structure: 8
CHAPTER 1: THE MANAGEMENT OF FOREIGN EXCHANGE RATE REGIME IN A MARKET-ORIENTED ECONOMY 9
1.1. The history and development of exchange rate regime. 9
1.2. Categories of exchange rate. 10
1.2.1. Definition of exchange rate and exchange rate regime. 10
1.2.2. Categories of exchange rates. 11
1.2.2.1. Official and unofficial exchange rate. 11
1.2.2.2. Nominal and real exchange rate. 11
1.2.2.3. Real Exchange Rate and Real Effective exchange rate. 12
1.2.3. Categories and trends of foreign exchange rate regimes in the world. 12
1.2.3.1. Categories of foreign exchange rate regimes. 12
1.2.3.2. Trends of foreign exchange rate regimes in the world. 14
1.3. Effects of foreign exchange rate regime on the macroeconomics variables. 16
1.3.1. Balance of Payment 17
1.3.1.1. Current Account 18
1.3.1.2. Capital Account 19
1.3.1.3. Effects of exchange rate and exchange rate regime on BOP. 20
1.3.2. Inflation. 22
1.3.3. The Effectiveness of Fiscal policy. 23
1.4. The management of foreign exchange rate and exchange rate regime. 25
1.4.1. Rate of Exchange Under the Gold Standard: 25
1.4.2. Rate of Exchange Under Managed Paper Standard. 26
1.4.3. Rate of Exchange Under Exchange Control 27
1.5. Theoretical Determinants of Exchange Rate Regimes. 27
1.5.1. OCA Theory. 27
1.5.2. Impossible Trinity. 28
1.5.3. Currency crisis. 29
1.5.4. Political economy. 30
CHAPTER 2: THE EVALUATION ON EXCHANGE RATE REGIME OF VIETNAM OVER TIME 32
2.1. The management of foreign exchange rate regimes and the fluctuation of foreign exchange rate in Vietnam through periods. 32
2.2. Evaluation of the foreign exchange regime management on Vietnam’s economy. 34
2.2.1. Effects of foreign exchange rate regime on BOP. 34
2.2.2. Effects of foreign exchange rate regimes on inflation. 37
2.3. Factor effecting the selection of foreign exchange rate regime. 40
2.3.1. Interest rate. 40
2.3.2. The expectation level of changing foreign exchange rate regime. 41
2.3.3. Inflation. 41
2.3.4. The decrease in the intervention level of Central Bank. 42
2.4. Shortcomings of SBV’s management on current exchange rate regime. 43
CHAPTER 3: SELECTING AN APPROPRIATE FOREIGN EXCHANGE RATE REGIME IN THE PERIOD OF RECOVERY IN VIETNAM . 45
3.1. The economy of Vietnam in the recovery period. 45
3.1.1. The opportunities. 45
3.1.2. The difficulties and challenges. 46
3.1.3. Implication to the foreign exchange rate regime. 47
3.2. Recommendations on selecting an appropriate foreign exchange rate regime in the recovery period 48
3.2.1. Recommendations on foreign exchange rate regime selection and management 49
3.2.1.1. Narrow the gap between official and unofficial exchange rate market 49
3.2.1.2. Implement the crawling floating exchange rate regime. 50
3.2.2. Suggestions about supporting policies for regulating exchange rate regime. 52
3.2.3. Others recommendations. 55
3.2.3.1. Building and following up the early warning model of foreign exchange rate and market crisis 55
3.2.3.2. Controlling foreign exchange rate regime through other factors. 59
CONCLUSION 63
REFERENCES. 65



LIST OF TABLES
Table 1.Categories of foreign exchange rate regimes 12
Table 2.Exchange rate regimes in Vietnam , 1989-2009 . 31
LIST OF FIGURES
Figure 1. Exchange rate around the official rate, 03/1989 to 12/2009 32
Figure 2.Nominal exchange rate and trade balance of Vietnam 35
Figure 3.Vietnam's inflation over the period 1991-1999 . 38
Figure 4.Vietnam’s Balance of Payments . 41
ABBREVIATION
BOP : Balance of Payment
CPFF : Commercial Paper Funding Facility
FDI : Foreign Direct Investment
FII : Foreign Indirect Investment
GSO : General Statistics Office (Vietnam)
IMF : International Monetary Fund
GDP : Gross Domestic Products
LIBOR : London Interbank Offered Rate
NEER : Nominal Effective Exchange Rate)
OER : Official Exchange Rate
PPIP : Public Private Investment Program
PPP : Purchasing Power Parity
REER : Real Effective Exchange Rate
SBV : State Bank of Vietnam
TALF : Asset-Backed Securities Loan Facility
TARP : Troubled Asset Relief Program
WB : World Bank
WTO : World Trade Organization
[h=1]ACKNOWLEDGEMENT[/h]First of all, I would like to give a warm thanking to all the lecturers of Advance Program of National Economics University in accordance with all the staff of National Research Department of the National Financial Supervisory Commission – NFSC for giving me such a good basic knowledge of economics in general and exchange rate regime in particular during the time of my internship.
Especially, I would also want to give a sincere gratitude to my supervisor Dr. Le Phong Chau who directly guides me in the process of making my report. Moreover, Dr. Le Xuan Nghia – the Vice chairman of National Financial Supervisory Commission is also the person that gives me lots of constructive comments to improve my report.
In two months working at Research Department of the National Financial Supervisory Commission – NFSC, I have tried my best to get information and proposed some recommendations to selecting an appropriate foreign exchange rate regime in the recovery period in Vietnam. However, there are certain limitations and mistakes due to the lack of time and information. Therefore, I am willing to receive any comments and suggestions. This two months of training at NFSC is such a valuable experience that I will never forget. It does help me a lot in preparing for my future career.





Dang Vuong Anh
[h=1]INTRODUCTION[/h][h=1]1. The essential of the research[/h]Vietnam’s economy is now in the process of transformation and development with deep integration with the world economy especially after its participation to WTO in 2006. In order to develop a strategy for the sustainable development, the Party and Government have determined to create a platform for macroeconomic stability, a stable position before the integration era. However, the process of expanding economy has created more pressure on the financial system. This requires timely reformations in mechanisms and operating policies to achieve the objectives of sustainable development, reduces trade deficits, inflation, and efficiently absorbs foreign investment flow.
Exchange rate regime has long been considered one of the most important tools for monetary policy. For a developing country like Vietnam, it is the key variable to stabilize the economic situation by its influences not only on the framework of trade and investment, but also on both monetary system, the entire macro economy and financial system. Moreover, the exchange rate also contributed to the cause of global economic and financial crises. Fundamental objectives of exchange rate regime are to limit the negative externalities and to support the commercial activities to minimize and prevent risks to the economy.
In the context of integration and multi-dimensional impacts, the monetary, exchange rate policy in Vietnam is expressing increasingly shortage of conformity in the future when the economy is highly opened. In addition, increasingly strong fluctuations of the turnover of capital flows along with the development of diversified financial institutions and financial instruments caused the exchange rate management policies become more complex and difficult to control. A reasonable and flexible mechanism for exchange rate adjustment is very important factor in order to support the control of inflation, dollarization, as well as to maintain competitiveness and promote export’s growth.
After the great impact of the 2008 financial crisis on the Vietnam’s economy, the government has clearly defined the target in 2009 is to be against the economic downturn and to ensure the social welfare. Strategic objectives with specific criteria of economic development vision 2011 – 2015 were proposed by the Ministry of Planning and Investment such as 5-year GDP average (2011-2015) increased by 7.5-8% per year, budget deficit in 2015 is 4.5%, current account deficit in 2011-2015 at about USD 30.7 billion, balance of capital surplus is 69 billion dollars, the overall balance of payments surplus is about USD 25.6 billion. Among various instruments to achieve these goals, the VND/USD exchange rate management is important. The competitiveness capacity of exports, the trade balance and balance of payments status, the national reserves, changes in production structure and confidence in the currency and the government, which are all factors measuring the health and motivation dominated developing country's economy, depend deeply on the official exchange rate.
The flexibility of exchange rate policy is also reflected in the flexibility in the selection of the target rate of the policy. It is really difficult to satisfy multiple objectives with an exchange rate policy in the same time, but keep applying an exchange rate policy just to serve a certain goal though a long period of time and ignore the changes in the environment is also not an appropriate strategy. For example, in order to reach the goal of reducing debt obligations, maintaining a low-rate policy, which valued its currency, may be essential in the time of maturity, but if this policy is maintained for too long, it could harm the long-term goal rather than maintain the trade balance’s stability or boosting exports. Therefore, every single period of the economy needs clearly defined objectives consistent to the specific context in order to promote the effectiveness of the exchange rate regime.
Observing the current trend of the economy, I have decided to do my research on the topic “Selecting an appropriate foreign exchange rate regime in the recovery period in Vietnam” with the aim of evaluating the effectiveness of the exchange rate regime applied at present time, particularly in the recovery period after the crisis, focusing on opportunities and challenges along with of the medium and long term economic development’s orientations of the Communist Party and Government, proposing some recommendations for improving the exchange rate regime in the near future.
[h=1]2. Research Methodology[/h]In the process of researching, the method of qualitative and quantitative analysis, simulation and synthesis comparison.
Qualitative analysis: based on proven economics theorems, practical experience applied in other countries and the actual conditions of Vietnam’s economy, combined with logical thinking, reasoning and dialectical analyzing, I have made identifications, descriptions and commentaries on the issue.
Quantitative Analysis: Given limited time and knowledge, the research just limited within evaluating data, converting raw data into informative charts and computing forecasting indicators rather than constructing of new model.
Simulation method: is a method of creating an assumed economic environment to investigate the extent of the economy reactions to the vagaries of macroeconomic variables or shocks from crises, economic downturns.
Synthesis comparison method: information and data of different countries in the same period of time were collected and compared to Vietnam’s.
Because of the fact that exchange rate is a macro-economic variable, the data used in this research are secondary information (available from different sources), with their accuracy and reliability were verified.
[h=1]3. Research scope:[/h]The scope of my research limited to the role, impact and effectiveness of the exchange rate’s regime and mechanism currently applied in Vietnam to macroeconomic variables during the period of economic recovery. On that basis, other preferential policies were studied and proposed.
[h=1]4. Research structure:[/h]The research consists of three parts.
Chapter 1: The management of foreign exchange rate regime in a market-oriented economy.
The aim of this chapter is introducing the scientific rationale of selecting an appropriate foreign exchange rate regime in the recovery period, going deep on the history of the formation and development of the exchange rate regimes, categorizing and analyzing various types of mechanisms being applied now, the impact of those mechanisms to macroeconomic variables and relating factors.
Chapter 2: The evaluation on the current foreign exchange regime of Vietnam.
This chapter evaluates the Vietnam’s exchange rate regime through each period with the focus from 2009 until now, proposes comments on the implications, factors of the mechanisms and the exchange rate regimes in the last period.
Chapter 3: Selecting an appropriate foreign exchange rate regime in the period of recovery in Vietnam.
Propose some solutions to improve the exchange rate regime in Vietnam during the period of economic recovery.