| Abstract: |
Vietnam is a developing country with a fixed exchange rate regime and the use
of foreign currency is under control of the monetary authorities. Hence, like
other developing countries, Vietnam also has the parallel exchange market that
exists together with the official exchange market though, it is illegal. The
existence of the parallel exchange market creates several complications to the
State Bank of Vietnam in their attempts to manage the foreign exchange market
and the exchange rate. Fluctuations in the parallel market rates affect both
the level of international reserves, the position of the economy and portfolio
decisions of the public. Therefore, a strong understanding of the parallel
foreign exchange market will help the State bank of Vietnam have sound
policies in the foreign exchange market. The monetary approach to the parallel
foreign exchange market initially developed by Blejer (1978) and then further
developed by Agénor (1991) is used. This approach focuses on the
disequilibrium in the money market in explaining movements in output, price,
the parallel market exchange rate, and change in net foreign assets An
increase of money supply by 1% causes the exchange rate in the parallel market
depreciated by 0.015%. A 1 per cent devaluation of the official exchange rate
would bring about 1.33 per cent devaluation of the parallel market rate. These
results bespeak the State Bank of Vietnam’s efforts to reduce the market
premium seem to be not success and stimulating economic growth by money supply
would lead to deprecation in both markets |