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Exchange rate pass through in Vietnam under the impact of inflationary environment

This article addresses the exchange rate pass-through to domestic prices under the impact of inflation. Using TVAR based approach and the variables of inflation, nominal effective exchange rate (NEER), output gap, and interbank rate in addition to monthly data applied to the period of 2000M1–2014M12, we find a non-linear relation in the pass-through to inflation along with the two thresholds of its. | Tran Ngoc Tho & Nguyen Thi Ngoc Trang / Journal of Economic Development 23(3) 89-109 89 Exchange Rate Pass-Through in Vietnam under the Impact of Inflationary Environment TRAN NGOC THO University of Economics HCMC – thotcdn@ueh.edu.vn NGUYEN THI NGOC TRANG University of Economics HCMC – trangtcdn@ueh.edu.vn ARTICLE INFO ABSTRACT Article history: This article addresses the exchange rate pass-through to domestic prices under the impact of inflation. Using TVAR based approach and the variables of inflation, nominal effective exchange rate (NEER), output gap, and interbank rate in addition to monthly data applied to the period of 2000M1–2014M12, we find a non-linear relation in the pass-through to inflation along with the two thresholds of its. Being above or below the thresholds results in different levels of the exchange rate pass-through, which is consistent with previous findings, with unclear/clear evidence found below/above the threshold of 0.3395%/month respectively. In the case of positive shocks of the exchange rate, the inflation is suggested to enormously rise and then return to equilibrium. We also attempt to clarify several distinct features of Vietnam affecting the pass-through and draw a few implications. Received: Aug. 02 2015 Received in revised form: Sep. 25 2015 Accepted: June 20 2016 Keywords: Exchange rate passthrough, inflation threshold, TVAR, Vietnam. 90 Tran Ngoc Tho & Nguyen Thi Ngoc Trang / Journal of Economic Development 23(3) 89-109 1. Introduction Many studies in the world have performed analyses of inflation in its response to changes in exchange rate. They also found reasons for low levels of exchange rate passthrough during the 80s and 90s, and pondered a potential linkage between inflationary environment and the pass-through. Taylor (2000) detected the low pass-through that cannot be perceived to be “exogenous to inflationary environment.” Afterward, a few researches attempted to examine the robustness of this argument, .