The relationship between inflation and exchange rate: The case of Vietnam

Abstract

Inflation and exchange rate seem to be very important factors which have significant effects on the economy. In this study, I investigate the relationship between inflation and exchange rate in the case of Vietnam from 2009 to 2014. Vector autoregression model will be employed as main econometric techniques in this thesis. The empirical results support that nominal exchange rate has negative impact on inflation at lag 1. And inflation has no impact on exchange rate. This result is not similar to the previous studies. However it can be explained by using J-curve theory of Davies (1962). The business implication that investors should be understand clearly about the condition of financial market if they want to get profit and avoid risks. Key words: Inflation, exchange rate, VAR model