| Peer-Reviewed

Purchasing Power Parity and International Fisher Effect Hypothesis Test: Evidence from Vietnam and 12 Major Trading Partners (2000 – 2022)

Received: 27 April 2023     Accepted: 22 May 2023     Published: 31 May 2023
Views:       Downloads:
Abstract

Amidst the expansion of the global economy and Vietnam's growing integration into the international arena, the country has formed substantial trade relations with a diverse range of nations across the globe. As a result, it is crucial to comprehend and study the dynamics of exchange rates, relying on the well-established theoretical frameworks of the Purchasing Power Parity (PPP) theory and the International Fisher Effect (IFE). Given the longstanding nature of these theories, the main purpose of this study is to assess the validity and applicability of the PPP theory and IFE in explaining the changes in exchange rates between Vietnam and its various trading partners. Employing a multiple linear regression approach, we investigated quarterly historical data comprising interest rates, inflation rates, and exchange rates of 12 trading partners, including the ASEAN-5, China, the U.S., Japan, South Korea, France, Canada, and Germany from Q1 2002 to Q4 2022. The results unequivocally show that neither the PPP theory nor the IFE can adequately explain the variations in the Vietnam Dong's exchange rate with respect to those of its trade partners, underlining the existence of significant theoretical deviations. Given these observations, policymakers and investors are strongly encouraged to adopt a holistic viewpoint, including a variety of indicators, and conducting additional research to make informed decisions that support long-term economic stability and growth.

Published in American Journal of Theoretical and Applied Business (Volume 9, Issue 2)
DOI 10.11648/j.ajtab.20230902.12
Page(s) 30-38
Creative Commons

This is an Open Access article, distributed under the terms of the Creative Commons Attribution 4.0 International License (http://creativecommons.org/licenses/by/4.0/), which permits unrestricted use, distribution and reproduction in any medium or format, provided the original work is properly cited.

Copyright

Copyright © The Author(s), 2023. Published by Science Publishing Group

Keywords

Purchasing Power Parity, International Fisher Effect, Hypothesis Testing, Exchange Rate, Inflation Rate, Interest Rate

References
[1] World Bank. (2022). World Development Indicators: Vietnam. Retrieved from https://data.worldbank.org/country/vietnam
[2] Cassel, Gustav. "The Present Situation of the Foreign Exchange," Econ. J. (March, 1918).
[3] Bahmani-Oskooee, M., & Saha, S. (2016). The Chinese yuan vis-a-vis the US dollar for two periods: Its high-frequency determinants and implications for PPP. China Economic Review, 39, 94-103.
[4] Taylor, M. P. (2002). Purchasing power parity. Review of international economics, 10 (3), 436-452.
[5] Gerlach, S. (2003). Components of real exchange rate fluctuations: Persistence, volatility and periodicity. Journal of International Money and Finance, 22 (6), 797-818.
[6] Rangvid, J. (2001). Purchasing power parity and cointegration: Some international evidence. Journal of International Money and Finance, 20 (2), 229-251.
[7] Chinn, M. D., & Frankel, J. A. (2007). Debt and interest rates: the US and the Euro Area. Economics Discussion Paper, (2007-11).
[8] Bahmani-Oskooee, M., & Niroomand, S. (2016). Revisiting Purchasing Power Parity and the Long-Run Validity of the Real Interest Rate Differential: Evidence from the United States. Global Business Review, 17 (1), 1-13.
[9] Binh, V. T., & Le, T. P. (2019). Testing purchasing power parity in Vietnam using the nonlinear LSTAR and ESTAR models. Journal of Economic Studies, 46 (4), 892-907. doi: 10.1108/JES-05-2017-0105 Fisher, I. (1930). The theory of interest. New York: Macmillan.
[10] Fisher, I. (1930). The theory of interest. New York: Macmillan.
[11] Lee, J. H., & Siklos, P. L. (2018). The International Fisher Effect: A Nonlinear Panel Data Analysis. Journal of International Money and Finance, 85, 150-165.
[12] Huang, Y., & Wang, Z. (2015). Empirical test of the International Fisher Effect: Evidence from the Chinese foreign exchange market. International Review of Economics & Finance, 38, 259-268.
[13] Lee, C. C., & Chiu, Y. B. (2011). The long-run relationship between exchange rates and inflation: Evidence from panel data. Journal of International Money and Finance, 30 (8), 1756-1771.
[14] Pham, V. H., & Nguyen, T. V. A. (2021). The validity of the International Fisher Effect for Vietnam and ASEAN-5 countries. Journal of Asian Finance, Economics and Business, 8 (6), 523-532. doi: 10.13106/jafeb.2021.vol8.no6.523.
[15] Cheung, Y. W., Chinn, M. D., & Fujii, E. (2003). China, Hong Kong and Taiwan: A quantitative assessment of real and financial integration. China Economic Review, 14 (3), 281-303.
[16] Lee, C. Y., & Teng, K. P. (2021). Testing the validity of international Fisher effect for Vietnam and Japan: Evidence from nonlinear unit root tests. Journal of Quantitative Economics, 19 (2), 409-434. doi: 10.1007/s40953-020-00248-3.
[17] Campbell, J. L., Chen, H., Dhaliwal, D. S., Lu, H. M., & Steele, L. B. (2014). The information content of mandatory risk factor disclosures in corporate filings. Review of Accounting Studies, 19, 396-455.
[18] Lo, S. K., & Rogoff, K. S. (2015). Misalignment and Its Durability. In G. Gopinath, E. Helpman, & K. Rogoff (Eds.), Handbook of International Economics (Vol. 4, pp. 201-264). Elsevier.
[19] Madura, J. (2020). International financial management. Cengage Learning.
[20] Oxelheim, L., Alviniussen, A., & Jankensgard, H. (2020). Corporate foreign exchange risk management. John Wiley & Sons.
[21] Ayu Putri Sumada Br.Ginting, Dede Ruslan, Fitrawaty (2018). Analysis The Determination of The Stability of Exchange Rates In Indonesia. Advances in Economics, Business and Management Research. atlantis-press.com. https://www.atlantispress.com/article/25891457.pdf
Cite This Article
  • APA Style

    Vo Thi Quy, Nguyen Quoc Thang, Nguyen Ngoc Hong Nhi, Le Quang Thang. (2023). Purchasing Power Parity and International Fisher Effect Hypothesis Test: Evidence from Vietnam and 12 Major Trading Partners (2000 – 2022). American Journal of Theoretical and Applied Business, 9(2), 30-38. https://doi.org/10.11648/j.ajtab.20230902.12

    Copy | Download

    ACS Style

    Vo Thi Quy; Nguyen Quoc Thang; Nguyen Ngoc Hong Nhi; Le Quang Thang. Purchasing Power Parity and International Fisher Effect Hypothesis Test: Evidence from Vietnam and 12 Major Trading Partners (2000 – 2022). Am. J. Theor. Appl. Bus. 2023, 9(2), 30-38. doi: 10.11648/j.ajtab.20230902.12

    Copy | Download

    AMA Style

    Vo Thi Quy, Nguyen Quoc Thang, Nguyen Ngoc Hong Nhi, Le Quang Thang. Purchasing Power Parity and International Fisher Effect Hypothesis Test: Evidence from Vietnam and 12 Major Trading Partners (2000 – 2022). Am J Theor Appl Bus. 2023;9(2):30-38. doi: 10.11648/j.ajtab.20230902.12

    Copy | Download

  • @article{10.11648/j.ajtab.20230902.12,
      author = {Vo Thi Quy and Nguyen Quoc Thang and Nguyen Ngoc Hong Nhi and Le Quang Thang},
      title = {Purchasing Power Parity and International Fisher Effect Hypothesis Test: Evidence from Vietnam and 12 Major Trading Partners (2000 – 2022)},
      journal = {American Journal of Theoretical and Applied Business},
      volume = {9},
      number = {2},
      pages = {30-38},
      doi = {10.11648/j.ajtab.20230902.12},
      url = {https://doi.org/10.11648/j.ajtab.20230902.12},
      eprint = {https://article.sciencepublishinggroup.com/pdf/10.11648.j.ajtab.20230902.12},
      abstract = {Amidst the expansion of the global economy and Vietnam's growing integration into the international arena, the country has formed substantial trade relations with a diverse range of nations across the globe. As a result, it is crucial to comprehend and study the dynamics of exchange rates, relying on the well-established theoretical frameworks of the Purchasing Power Parity (PPP) theory and the International Fisher Effect (IFE). Given the longstanding nature of these theories, the main purpose of this study is to assess the validity and applicability of the PPP theory and IFE in explaining the changes in exchange rates between Vietnam and its various trading partners. Employing a multiple linear regression approach, we investigated quarterly historical data comprising interest rates, inflation rates, and exchange rates of 12 trading partners, including the ASEAN-5, China, the U.S., Japan, South Korea, France, Canada, and Germany from Q1 2002 to Q4 2022. The results unequivocally show that neither the PPP theory nor the IFE can adequately explain the variations in the Vietnam Dong's exchange rate with respect to those of its trade partners, underlining the existence of significant theoretical deviations. Given these observations, policymakers and investors are strongly encouraged to adopt a holistic viewpoint, including a variety of indicators, and conducting additional research to make informed decisions that support long-term economic stability and growth.},
     year = {2023}
    }
    

    Copy | Download

  • TY  - JOUR
    T1  - Purchasing Power Parity and International Fisher Effect Hypothesis Test: Evidence from Vietnam and 12 Major Trading Partners (2000 – 2022)
    AU  - Vo Thi Quy
    AU  - Nguyen Quoc Thang
    AU  - Nguyen Ngoc Hong Nhi
    AU  - Le Quang Thang
    Y1  - 2023/05/31
    PY  - 2023
    N1  - https://doi.org/10.11648/j.ajtab.20230902.12
    DO  - 10.11648/j.ajtab.20230902.12
    T2  - American Journal of Theoretical and Applied Business
    JF  - American Journal of Theoretical and Applied Business
    JO  - American Journal of Theoretical and Applied Business
    SP  - 30
    EP  - 38
    PB  - Science Publishing Group
    SN  - 2469-7842
    UR  - https://doi.org/10.11648/j.ajtab.20230902.12
    AB  - Amidst the expansion of the global economy and Vietnam's growing integration into the international arena, the country has formed substantial trade relations with a diverse range of nations across the globe. As a result, it is crucial to comprehend and study the dynamics of exchange rates, relying on the well-established theoretical frameworks of the Purchasing Power Parity (PPP) theory and the International Fisher Effect (IFE). Given the longstanding nature of these theories, the main purpose of this study is to assess the validity and applicability of the PPP theory and IFE in explaining the changes in exchange rates between Vietnam and its various trading partners. Employing a multiple linear regression approach, we investigated quarterly historical data comprising interest rates, inflation rates, and exchange rates of 12 trading partners, including the ASEAN-5, China, the U.S., Japan, South Korea, France, Canada, and Germany from Q1 2002 to Q4 2022. The results unequivocally show that neither the PPP theory nor the IFE can adequately explain the variations in the Vietnam Dong's exchange rate with respect to those of its trade partners, underlining the existence of significant theoretical deviations. Given these observations, policymakers and investors are strongly encouraged to adopt a holistic viewpoint, including a variety of indicators, and conducting additional research to make informed decisions that support long-term economic stability and growth.
    VL  - 9
    IS  - 2
    ER  - 

    Copy | Download

Author Information
  • Business Administration Department, Vietnam National University – Ho Chi Minh City International University, Thu Dau Mot, Vietnam

  • Business Administration Department, Vietnam National University – Ho Chi Minh City International University, Thu Dau Mot, Vietnam

  • Business Administration Department, Vietnam National University – Ho Chi Minh City International University, Thu Dau Mot, Vietnam

  • Business Administration Department, Vietnam National University – Ho Chi Minh City International University, Thu Dau Mot, Vietnam

  • Sections