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Chapter1: Nature and background of the study

1.1 Introduction

Globalisation has resulted in a new configuration of world trade, production andfinance, and has had a direct impact on international competitiveness, trade andfinancial flows and relative prices. In addition, it has brought about changes in thedynamic interactions of economic variables, including possibly the way changes inthe exchange rate affect the economy. This applies to Vietnam as well. An exchangerate is essentially what its name implies: it is the rate at which one would need toexchange ones currency for the currency of another country. These rates of exchangecan change at a moments notice !or less" in currency mar#ets where the currenciesare freely floating. Thus, the exchange rate is a conversion factor, a multiplier or aratio, depending on the direction of conversion. $xchange rate is undoubtedly

important because it allows for the conversion of one country%s currency into that ofanother, thereby facilitating international trade for purchases of goods and servicesand&or transfer of funds between countries, and it allows price comparison of similargoods in different countries. In general, the price difference between similar goodsdetermines which goods are traded and where they are shipped or sourced. It is safe tosay that the exchange rate is a significant factor influencing the competitiveness ofagricultural commodities and the profitability of farming enterprises. Therefore, the

purpose of this research is to point out which factors play a significant role on theresult of the the exchange rate. Throughout this research, we loo# at some mainfactors which affect the exchange rate with data gathered mainly from secondaryresearch.

1.2 Overview of exchange rate in Vietna fro 1!!" to 2#1"

In order to put the overall discussion into perspective, this part provides a generaloverview of the ma'or points in the exchange rate in Vietnam in recent years. Asobserved and recorded, the exchange rate in Vietnam was lowest in ())* at))*+.- and hit the highest rate in (/.

1." $ationa% for the study

The foregoing discussion implies the fact that there has been a fluctuation in the

exchange rate in Vietnam throughout the period from ())/ to (/. Vietnam economy

experiences important turning points in - when became the official members of

0T1. Ta#ing this under consideration, conducting the research on this period enables

us to capture the effects of economic elements on the amount of 23I more precisely.

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1.& 'ssuptions

In order to apply ordinary least s4uares method which is the one utili5ed in this paper,

( classical assumptions and ( optional assumption must be satisfied6 however in this

research, we focus on detecting and solving the violation of following assumptions

namely: multicollinearity, heteroscedasticity, autocorrelation and normal distribution

of residual to ma#e sure that our model is applicable.

Chapter2: (iterature review

2.1 )heories of exchange rate

2.1.1 The Purchasing Power Parity or PPPhappens to be one of the most significantapproaches to determine exchange rate. 777 is primarily based on the 89aw of 1ne

7rice. ;owever, this law is based on the assumption that identical goods are sold at

e4ual prices. It is a flow model of the balance of payment. This law lays down that

exchange rate of currencies have to compensate for the differences in prices of goods.

The

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2.2 *rior research

Tran 7huc =guyen and 3uc>Tho =guyen Griffith ?usiness @chool !A2$"Griffith niversity: Vietnams exchange rate policy and implications for its

foreign exchange market, 1986-2009

Bean>7ascal ?assino and ;ironobu =a#agawa, 7aul ValCry niversity:Exchange rates and exchange rate policies in Vietnam nder !rench rle,

18"8-19#$

Tran>7huc =guyen, 3.T. =guyen, Ben Be @u and Tarlo# @ingh: %hifts inexchange rate regime and inflation persistence in Vietnam, 1992-2010

2." +ode% specification

0ith the #nowledge getting from the prior researches and by applying the

econometrics theory to examine the effect of each factor, we choose our model as

below:

In which the variables are:

$D+

2.".1 ,ependent variab%e

2or this research, we choose the exchange rate as the dependent variable. 0ith the

fundamental #nowledge getting from some prior researches, we analy5e effects of the

following factors on the exchange rate: Vietnam interest rate, @ interest rate, money

supply and trade per G37.

2.".2 Independent variab%es

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2.".2.1 Vietna interest rate

Interest rates and exchange rates are highly correlated. ?y manipulating interestrates,centra% banksexert influence exchange rates, and changing interest ratesimpact currency values. ;igher interest rates offer lenders in an economy a

higher return relative to other countries. Therefore, higher interest rates attractforeign capital and cause the exchange rate to rise. The impact of higher interestrates is mitigated, however, if additional factors serve to drive the currencydown. The opposite relationship exists for decreasing interest rates > that is,lower interest rates tend to decrease exchange rate.

2.".2.& - interest rate

9i#e Vietnamese interest rate, @ interest rate also plays a significant role in affecting

the exchange rate. ;ence, we choose @ interest rate, along with Vietnam interest rateas independent variables to study if these two factors can greatly affect the dependentvariable or not.

2.".2." +oney supp%y

2rom what we have learned in Eicroeconomics, in many circumstances an increase inthe money supply could lead to a depreciation in the exchange rate. Thats why moneysupply is the /rdindependent variable we would li#e to use in order to research moreabout the relationship of it with the exchange rate and how it can affect the exchangerate in the process.

2.".2.2 )rade per /,*

A ratio comparing export prices to import prices, the terms of trade is related tocurrent accounts and thebalance of payments.If the price of a country%s exports rises

by a greater rate than that of its imports, its terms of trade have favorably improved.Increasing terms of trade shows greater demand for the country%s exports. This, inturn, results in rising revenues from exports, which provides increased demand for thecountry%s currency !and an increase in the currency%s value". If the price of exportsrises by a smaller rate than that of its imports, the currency%s value will decrease in

relations to its trading partners. Therefore, trade per G37 is chose as anotherindependentvariable.

2."." ,uy variab%e

Apart from four independent variables mentioned above, we choose one dummy

variable !3" which is the time frame. 3( if ->(/ and 3 if ())/>+. The

reason we decided to use it as dummy variable is because Vietnam economy

experiences important turning points in - when became the official members of

0T1.

http://www.investopedia.com/terms/c/centralbank.asphttp://www.investopedia.com/terms/b/bop.asphttp://www.investopedia.com/terms/c/centralbank.asphttp://www.investopedia.com/terms/b/bop.asp

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https:00www.ecb.europa.eu0pub0pdf0scpops0ecbocp!&.pdf

https:00edis.ifas.uf%.edu0fe&

http:00www.tradingeconoics.co0vietna0currency

http:00www.investopedia.co0artic%es0basics0#&0##3#&.asp

http:00www.econoicshe%p.org0b%og011#0currency0oney4supp%y4and4the4

exchange4rate0

https://www.ecb.europa.eu/pub/pdf/scpops/ecbocp94.pdfhttps://edis.ifas.ufl.edu/fe546http://www.tradingeconomics.com/vietnam/currencyhttp://www.investopedia.com/articles/basics/04/050704.asphttp://www.economicshelp.org/blog/11550/currency/money-supply-and-the-exchange-rate/http://www.economicshelp.org/blog/11550/currency/money-supply-and-the-exchange-rate/https://www.ecb.europa.eu/pub/pdf/scpops/ecbocp94.pdfhttps://edis.ifas.ufl.edu/fe546http://www.tradingeconomics.com/vietnam/currencyhttp://www.investopedia.com/articles/basics/04/050704.asphttp://www.economicshelp.org/blog/11550/currency/money-supply-and-the-exchange-rate/http://www.economicshelp.org/blog/11550/currency/money-supply-and-the-exchange-rate/