An approach to the theory of the parallel foreign exchange rates statistical evaluation of USDVND exchange rates

Abstract

Foreign exchange system has become increasingly important to all open economies. Facing a harsh integration into the world economy, Vietnam’s foreign exchange management policy exhibits a critical issue for the upcoming economic development process. Up until now, several researchers have utilized classical models to enlighten the forex dynamics in Vietnam, such as those of Mundell–Fleming or financial crisis by Krugman, Flood-Garber. Most studies focus on three states of the foreign exchange management: fixed, floated and combined. This study rather proposes a new approach based on explanation of parallel exchange rate system, compared to currency crisis theories. In so doing, the study shows a possibility that Vietnam incidentally escaped from the regional currency crisis, due to the presence of parallel system. Prior to our statistical test, the interesting question had been: “it is true that one of the major reasons that helped Vietnam avoid in part the Asian financial crisis was the existence of a working forex parallel mechanism and working ‘black’ market?”. The paper indicates that the possibility is highly likely, both theoretically and empirically.