The macroeconomic effects of oil price shocks on Vietnam: Evidence from an over-identifying SVAR analysis

This paper studies the macroeconomic effects of oil price shocks in Vietnam. It expands Kilian's (2009. "Not All Oil Price Shocks are Alike: Disentangling Demand and Supply Shocks in the Crude Oil Market." American Economic Review 99: 1053-1069) framework to simultaneously consider world interest rate shocks and comprehensively assess their consequences on international competitiveness and the State Bank management of the monetary policy. Methodologically, this implies dealing with an over-identified structural vector autoregression (SVAR) model. Data wise, the analysis is performed on a unique dataset with variables defined at a monthly frequency running from 1998:01 to 2018:12. Demand-side, global-, and specific-oil price shocks determine inflation and international competitiveness. They play an essential role in explaining the long-run variations of several Vietnamese macroeconomic indicators (mainly the trade balance, three-month interest rate, and the inflation rate). Vietnam's Dong pegging to the US Dollar results in a stronger impact of these shocks when real exchange rates and the rate of exports are modelled, than when real effective exchange rates and the trade balance are modelled. In the latter case, shock absorption is quicker given the multilateral trade context in which no single pegging holds. In association with the strong tie between Vietnam's Dong and the U.S. dollar, we also uncover remarkable effects of the U.S. federal funds rate shocks. Supply-side oil price shocks have little impact on inflation and international competitiveness but condition the monetary policy. Neglecting such influence in the past may have resulted in an excessively conservative monetary policy.