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Drivers behind inflation in Vietnam

Date: 27 Jan 2012

Inflation is one of the key macro economic problems in Vietnam since 2004. In 2008 it reached 23% - the highest level among main developing countries.

Inflation in Vietnam vs. other Growing Markets

What drives it? As usual, there are a lot of opinions without any serious analytical support. In contrast to them I just found an article which uses vector auto-regression (VAR) to decouple effects of the inflation in Vietnam to supply shocks, demand shocks and monetary shocks. It's named The Causes of Recent Inflation in Vietnam: Evidence from a VAR with Sign Restrictions and written by Tuan Khai Vu from one of Japanese universities (Seikei University).

2012-01-27 Drivers of Vietnam's inflaiton

Conclusions of the modeling:
  • In the deflation period 2000-01 monetary shocks appear to have the largest contribution.
  • In the period 2004-07 when inflation became higher, demand shocks and, to a lesser extent, monetary shocks seem to be the main determinants, while supply shocks seem to work in the favorable direction to reduce inflation
  • In the year 2008, when inflation hit the peak of 23.1%, all three types of shocks are important determinants with supply shocks contributing slightly more in the second and third quarters of the year
  • In the period 2008Q4-10Q3 demand shocks turn negative which might reflect the tightened fiscal policy of the government to fight inflation.
    • Monetary shocks are also negative in the first three quarters of the year 2009, which is consistent with the fact that monetary policy was also tightened in this period.
    • In contrast, supply shocks are always positive in the period 2008Q4-10Q3, making inflation to be persistent. In the year 2010 monetary shocks turn positive, pushing up inflation.
The paper can be downloaded here: The Causes of Recent Inflation in Vietnam

Tags: Inflation, Vietnam

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