Fighting inflation in a dollarized economy: The case of Vietnam

During its transition towards a market economy, Vietnam embarked upon a path of disinflation through dollarization. In this paper, we develop a model to shed light on the determinants of inflation under dollarization and estimate it for Vietnam in the 1990s using a two-step procedure. During this period, inflation was induced by exchange rate variations and by an excess of broad money. The paper shows that management of exchange rate fluctuations combined with a restrictive monetary policy based on broadly defined money was essential for the Vietnamese authorities to succeed in fighting inflation. Illustrative simulations based on the sharp 25% exchange rate depreciation of 1997 to 1998 suggest that this depreciation led to an additional cumulated inflation of 13% over the period. Journal of Comparative Economics 34 (3) (2006) 564–581. CERDI (CNRS and University of Auvergne), 65 Bd F. Mitterrand, 63000 Clermont-Ferrand, France. © 2006 Association for Comparative Economic Studies. Published by Elsevier Inc. All rights reserved.