Real universe job
Inflation is considered a serious menace to economic wellbeing, since it causes the cost of life to lift and the value of investings to fall. In the instance of Vietnam, the state incurred high degree of rising prices during a long period 1995-2010, on mean 7 % /year, which is more relentless and more volatile than those of other states in the Southeast Asia. As a consequence, commanding rising prices has been a high precedence of the Vietnamese authorities. In order to contend against rising prices successfully, find of its determiners is of great importance. Understanding the causes of the issue is indispensable for updating current policies to stifle rising prices and stabilise the macro economic system.
There have been many empirical surveies on the determiners of rising prices in Vietnam. These surveies cover different clip spans. However, most of them were conducted for the period before 2005. Therefore, this paper fills a clip spread. Furthermore, the survey besides utilizes a longer clip span, which will give a more precise penetration into the issue.
Furthermore, recent events such as the fall ining WTO of Vietnam in 2007, the planetary fiscal crisis 2007-2008, crisp fluctuation in the universe oil and gold monetary value, and the exchange rate job have posed the demand for farther survey on rising prices in the new context.
2. Research inquiries
What are the determiners of rising prices in Vietnam over the period 1995-2010?
What are the short-term determiners of rising prices in Vietnam over the period 1995-2010?
What are the long-term determiners of rising prices in Vietnam over the period 1995-2010?
Demand-pull rising prices
Demand-pull rising prices happens when the degree of aggregative demand grows faster than the implicit in degree of supply.
Aggregate demand is made up of all disbursement in the economic system.
AD = C + I + G + ( X-M )
C stands for consumer outgo.
I stands for investing.
G stands for the authorities outgo.
Ten and M severally stand for exports and imports.
Figure 1: demand-pull rising prices
Beginning: hypertext transfer protocol: //www.bized.co.uk/virtual/bank/economics/mpol/inflation/causes/theories1.htm
Demand-pull rising prices may get down with any factor that increases aggregative demand. Consumers may pass more, possibly because involvement rates have fallen, revenue enhancements have been cut or merely because there is a greater degree of consumer assurance. Firms may put more with outlook of future net income. The authorities may pass more on substructure, wellness, instruction, defense mechanism, etc. It may besides be a roar in export overseas.
Cost-push rising prices
Cost-push rising prices is an rising prices that consequences from an initial addition in costs.
There are two chief beginnings of increased costs
An addition in pay rate
An addition in the monetary value of natural stuffs, such as oil.
Figure 2: Cost-push rising prices
Beginning: hypertext transfer protocol: //www.bized.co.uk/virtual/bank/economics/mpol/inflation/causes/theories2.htm
Monetarists believe the most important factor act uponing rising prices or deflation is how fast the money supply grows or psychiatrists. They emphasize the function of pecuniary policy better than financial policy in commanding rising prices. Harmonizing to the celebrated monetarist economic expert Milton Friedman, “ Inflation is ever and everyplace a pecuniary phenomenon. ”
This theory begins with the equation of exchange:
MV = PQ
M is the nominal measure of money.
V is the speed of money in concluding outgos ;
P is the general monetary value degree ;
Q is an index of the existent value of concluding outgos ;
Monetarists assume that V is unaffected by pecuniary policy ( at least in the long tally ) , and Q is determined in the long tally by the productive capacity of the economic system. Under these premises, the primary driver of P is alterations in M. In other words additions in the money supply would take to rising prices. The message is simple ; command the money supply to command rising prices.
Figure 3: Relationship among money supply, measure of money, value of money and monetary value degree.
Beginning: hypertext transfer protocol: //www.sparknotes.com/economics/macro/money/section2.rhtml
There have been many empirical surveies on rising prices in Vietnam. In the most recent research “ Macroeconomic Determinants of Vietnam ‘s Inflation 2000-2010: Evidence and Analysis ” , Nguyen Thi Thu Hang and Nguyen Duc Thanh have developed a intercrossed theoretical account of rising prices determiners that comprise both the structural attack and the monetarist attack every bit good as employed Vector Error Correction Model ( VECM ) econometric technique to come to the undermentioned consequences
( 1 ) Public ‘s memory and outlook play a important function in determining the current rising prices. Memory about a period of high rising prices in the yesteryear seems merely to get down to melt off after 6 months of systematically low and stable rising prices.
( 2 ) The velocity of accommodation of the foreign exchange market and the money market to perturbations is really low or even near nothing.
( 3 ) Stimulating the existent economic system through increasing productiveness and end product growing has better impact on commanding rising prices in the longer run than pecuniary and nonmonetary steps.
( 4 ) In contrast to old survey consequences, the theoretical account found considerable function of exchange rate, a devaluation in peculiar, on increasing force per unit areas on rising prices.
4. Conceptual model
Inflation = degree Fahrenheit ( GDP, old rising prices, exchange rate, involvement rate, money supply, recognition, universe oil monetary value, universe rice monetary value, cumulative budget shortages, pay rate )
1. Interest rate
5. Budget shortage
1. Wage rate
2. World oil monetary value
3. World rice monetary value
4. Exchange rate
1. Previous twelvemonth rising prices
Monthly secondary informations covering the period from January 1995 to December 2010 are used for this survey. These informations are collected from the General Statistics Office ( GSO ) , State Bank of Vietnam ( SBV ) , Ministry of Finance ( MOF ) , International Monetary Fund ( IMF ) , and World Bank ( WB )
Consumer price index
monthly rising prices informations are collected from GSO. The index is rebased to January 1995
Money supply ( M2 )
International fiscal statistics ( IFS ) , IMF statistics informations base
International monetary fund
monthly informations on loaning rates from SBV
day-to-day official exchange rates ( VND/USD ) are collected from SBV. Monthly official exchange rates are calculated by taking the norm of the day-to-day official exchange rates within each month.
Accumulative budget shortage
World oil monetary value
America ‘s Energy Information
Administration ( EIA )
World rice monetary value
International Rice Research Institute ( IRRI )
5. Research method
The survey uses quantitative method to place the determiners of rising prices in Vietnam. The survey includes the undermentioned stairss
Unit root testing: The first measure is to look into the set of informations series whether they are stationary. Augmented Dickey-Fuller ( ADF ) trial is used to deduce the accurate decision on unit roots of the variables. The figure of slowdowns in ADF trial is selected based on Akaike Information Criterion ( AIC ) and Schawarz Information Criterion ( SIC ) .
Cointegration analysis: Johansen cointegration trial is used to look into for long run relationships among variables of the theoretical account.
Vector mistake rectification theoretical account ( VECM ) :
VECM is used to analyze the short-term kineticss of the series. The VECM is a restricted signifier of VAR that incorporates co-integration limitations. This specification restricts the behaviour of co-integrating variables to meet to their long-term equilibrium. Furthermore, this specification allows for a broad scope of short-run kineticss. VECM is used to prove the determiners of monthly per centum alteration in domestic rising prices.