tailieunhanh - Inflation and exchange rate: A vicious circle of Vietnam

Even though every country nurtures a desire to attain a sustainable economic growth (. a high growth rate, a low inflation rate, and a stable exchange rate), it is not an easy task. Vietnam thus far has pursued the target of high growth rate, while its inflation rate and exchange rate is perplexedly fluctuating and hard to control. | RESEARCHES & DISCUSSIONS Even though every country nurtures a desire to attain a sustainable economic growth (. a high growth rate, a low inflation rate, and a stable exchange rate), it is not an easy task. Vietnam thus far has pursued the target of high growth rate, while its inflation rate and exchange rate is perplexedly fluctuating and hard to control. One of the main excuses for the high appreciation in commodity price in Vietnam is the rise in the price of crude oil, food, and materials for industries in the world market. The high inflation rate will adversely depreciate the value of domestic currency. The discrepancy between official and unofficial exchange rates to the USD has been closed by the SBV. Albeit such the adjustment in the exchange rate will help stabilize the forex market and facilitate the exportation, Vietnam may also be exposed to a high inflation rate and upheavals in the money market. Thus, in order to ensure macroeconomic stability with controlling inflation as the central task, and secure social welfare as set forth in the Resolution 11/NQ-CP dated Feb. 24, 2011, it is necessary to analyze reasons of inflation and gaps in exchange rate and find appropriate solutions to these problems. Keywords: vicious circle, exchange rate, inflation * HCMC University of Economics ** University of Finance and Marketing Economic Development Review - June 2011 15 RESEARCHES & DISCUSSIONS 1. The linkage between inflation and exchange rate in Vietnam In recent years, Vietnam’s inflation has fluctuated dizzily. To be more specific, the CPI peaked in 2008 and slumped to in 2009, yet then shot up in the following year. Hence, inflation has become a matter of concern to the government when prices of crude oil, gold, and US dollar are soaring up. rate by , . a US dollar can be converted into VND20,693 – a record level within some recent years. Since then, SBV has employed the flexible interest rate regime as per fluctuations