Abstract
The paper’s objective is to assess the impact of the ceiling and zero interest rate for US dollar deposits on dollarization index and, more generally, to find factors affecting dollarization in Vietnam. By employing the VAR model with six variables, the paper found empirical evidence that the ceiling on the interest rate for US dollar deposits and the interest rate differentials are important factors affecting deposit dollarization in Vietnam. These results are in agreement with the fact that after the ceiling rate for US dollar deposits was decreased from three percent to zero while maintaining a positive interest rate differential, the deposit dollarization ratio decreased significantly. Inflation, parallel market premium, and international reserves are also found to be important determinants of dollarization status in Vietnam.
This research is funded by Vietnam National Foundation for Science and Technology Development (NAFOSTED) under grant number 502.99 - 2016.01.
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Notes
- 1.
Vietnam is an open economy with openness ratio of more than 100% since 2000s. In 2014, its openness ratio was 161%. In addition, Vietnam has trade and investment relationship with more than 80 countries in the world.
- 2.
Similar to dollarization, a country could be suffered from euroization status.
- 3.
During the Vietnam War, due to a large amount of the US dollar aide from the US and to the existence of US army bases, residents in the South preferred to use the US dollar for buying goods and services instead of local currency. According to Dacy (1986), during 20 years of the Vietnam War, the South received about 8.5 billion USD as non-refundable aid (Table 10.2, p. 200), not including borrowing from the US government for infrastructure and economic development and an annual allowance for the US army located in the South.
- 4.
http://www.tinmoi.vn/Cac-hang-oto-niem-yet-gia-bang-USD-vi-VND-bat-tien-0112186.html accessed on 4 July, 2015.
- 5.
http://m.tin247.com/van_qua_nhieu_doanh_nghiep_mat_hang_niem_yet_gia_bang_usd-3-21429458.html accessed on 4 July, 2015.
- 6.
FPT University was found to quote tuition fees in the US dollar during 2010–2011http://laodong.com.vn/kinh-doanh/dai-hoc-fpt-bi-phat-500-trieu-dong-vi-niem-yet-hoc-phi-bang-usd-7863.bld accessed on 4 July, 2015.
- 7.
April 9, 2011, was the first time the SBV imposed a ceiling of 3% on the US dollar deposit interest rates. At that time, market rates for US dollar deposits were 5–6%.
- 8.
Official rate is announced by the SBV on daily and was replaced by central rate since 4th January 2016.
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Appendix
Appendix
Selecting Lag Length of Model. Lag length of the model is 1 period. This was selected is based on five criteria including LR, FPE (Final prediction error), AIC (Akaike information criterion), SC (Schwarz information criterion), HQ (Hannan-Quinn information criterion), as seen in the following table.
Lag | LogL | LR | FPE | AIC | SC | HQ |
|---|---|---|---|---|---|---|
0 | −711.6017 | NA | 665.5948 | 23.52793 | 23.73555 | 23.60930 |
1 | −562.2012 | 264.5124 | 16.25998* | 19.80988 | 21.26327* | 20.37947* |
2 | −535.2061 | 42.48411 | 22.59353 | 20.10512 | 22.80427 | 21.16294 |
3 | −497.9090 | 51.35995* | 23.65951 | 20.06259 | 24.00750 | 21.60864 |
4 | −459.8026 | 44.97808 | 26.39573 | 19.99353 | 25.18420 | 22.02780 |
5 | −417.0835 | 42.01875 | 29.11211 | 19.77323* | 26.20967 | 22.29573 |
Diagnosis Tests. In order to check the appropriateness of the estimated VAR model, we estimate AR roots (aka as the inverse roots) of the characteristic AR polynomial. Below table and figure show that the estimated VAR is stable because all roots have modulus less than one, and thus lie inside the unit circle (Fig. 8).
Root | Modulus |
|---|---|
0.921797 | 0.921797 |
0.626391 | 0.626391 |
0.231398 | 0.231398 |
0.208391 | 0.208391 |
−0.175961 | 0.175961 |
−0.157069 | 0.157069 |
Checking stationarity.
We also performed the Portmanteau Tests for Autocorrelations. Portmanteau Test computes the multivariate Box-Pierce/Ljung-Box Q-statistics for residual serial correlation up to the specified order. We found that with different lags, p-values of Q-statistics are greater than 5%. We thus accept the null hypothesis of no serial correlation up to lag 2.
Lags | Q-Stat | Prob. | Adj Q-Stat | Prob. | df |
|---|---|---|---|---|---|
1 | 18.01580 | NA* | 18.29729 | NA* | NA* |
2 | 42.23825 | 0.2194 | 43.28872 | 0.1882 | 36 |
In order to test for a range of specifications of heteroskedasticity in the residuals of VAR equation, we employed the White’s test. Results of White’s Heteroskedasticity Test show that we can accept the null hypothesis of homoskedasticity at one percent level of significance.
VAR Residual Heteroskedasticity Tests: No Cross Terms (only levels and squares) | |||
Date: 06/30/17 Time: 08:35 | |||
Sample: 2011M04 2016M10 | |||
Included observations: 65 | |||
Joint test: | |||
Chi-sq | df | Prob. | |
284.1719 | 252 | 0.0799 | |
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Anh, P.T.H. (2018). Zero Interest Rate for the US Dollar Deposit and Dollarization: The Case of Vietnam. In: Anh, L., Dong, L., Kreinovich, V., Thach, N. (eds) Econometrics for Financial Applications. ECONVN 2018. Studies in Computational Intelligence, vol 760. Springer, Cham. https://doi.org/10.1007/978-3-319-73150-6_60
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