Responding to the global financial crisis: Vietnamese exchange rate policy, 2008–2009

Responding to the global financial crisis: 

Vietnamese exchange rate policy, 2008–2009

Shinji Takagi a,*, Thi Hoang Anh Pham a,b
a Graduate School of Economics, Osaka University, Japan
b Banking Academy of Vietnam, Vietnam

The paper presents an analysis of exchange rate policy in Vietnam during 2008–2009. In
early 2008, the country faced a sudden reversal of capital flows as signs of developing
domestic vulnerabilities became evident. The downward pressure on the dong then
intensified with the onset of the global financial crisis in the fall. In these environments,
the Vietnamese authorities responded with various exchange rate policy measures. The
paper documents a shift in Vietnam’s de facto exchange rate regime, from a basket peg to a
simple US dollar peg, when the domestic vulnerabilities became compounded by the
evolving global crisis. The authorities utilized additional measures to relieve pressure on
the parallel exchange rate. An event study methodology finds little evidence of systematic
effectiveness for these policy actions; any effectiveness was short-lived. A close
examination of individual actions suggests that the impact of foreign exchange market
intervention appeared more consistent than any other type of measure and most effective
when combined with other measures.

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1. Introduction
The paper presents an analysis of exchange rate policy in Vietnam during 2008–2009, when the country faced a series of domestic and global shocks. Although Vietnam had earlier experienced appreciation pressure amid buoyant capital inflows, in early 2008, the country faced a sudden reversal as signs of developing domestic vulnerabilities became evident. The downward pressure on the exchange rate then intensified with the onset of the global financial crisis in the fall. In these
environments, the Vietnamese authorities responded with various exchange rate policy measures to relieve downward pressure on the dong. A novel feature of our analysis is the application of a Kalman filter to the celebrated Frankel–Wei regression, in order to identify the timing of a shift in the de facto exchange rate regime. An event study (or news analysis) methodology is then used to assess the effectiveness of various exchange rate measures in stabilizing the parallel exchange
rate relative to the official rate and reducing the parallel market premium.