Transmission of World Prices to the Vietnamese Economy

International economic integration has been a central policy goal for the Vietnam government since the doi moi reform was initiated in 1986. We explore the Vietnamese increasing integration into the world market and bouts of high inflation. Five price transmission models using three levels of sectoral aggregation, examine the transmission of world price shocks to the Vietnamese domestic market and the impact of inflation on domestic prices from 1999 to 2008. Empirical results find wide sectoral variation, imperfect price transmission, non-neutral inflation pass-through, the dominant effect of inflation on domestic prices, and a low speed of adjustment to the Law of One Price. We conclude that policy analysts need disaggregated sector-level price transmission elasticities for accurate trade policy analysis and that careful attention must be paid to how inflation influences the economy. Moreover, while tariff reforms have typically been focused in many studies to come to grips with policy outcomes, the key to such understanding should be more associated with institutional reforms, market access, and incentives for foreign investment.