MACROECONOMIC RESPONSES TO DEVALUATION POLICY IN VIETNAM: AN EMPIRICAL STUDY USING VECTOR ERROR CORRECTION MODEL (VECM)

Abstract

This paper was conducted to empirically examine the macroeconomic responses on devaluation policy in Vietnam by using Vector error correction model applying for data from the first quarter of year 2000 to the fourth quarter of 2016. Through the tests of the impulse response function, the author investigated the devaluation policy caused inflationary both in the short run and long run. Besides, the results showed that the trade balance did not improve, even deficit in some first periods then turned to be surplus but became unstable caused by the devaluation policy. The results also showed that this exchange rate policy could not be used to attract foreign direct investment inflow in Vietnam. Also, the findings indicate that devaluation had a positive impact on Vietnam stock index. Finally, the effect of depreciation on improving gross domestic product was not sustainable.