Journal of Economic Development
No. 188 , April 2010, Page 09-14

Economic and Institutional Factors Affecting Causes of Currency Crisis: Early Warning System and Suggestions on Vietnam's Macroeconomic Stability Policy
NGUYỄN TRỌNG HOÀI & Trương Hồng Tuấn

"The US financial crisis in 2008 led to an inevitable chance for scholars to review traditional theories of financial crisis in order to find out fundamental causes of the crisis, and issue early warnings to developing countries including Vietnam. Although adjustment to the exchange rate by the SBV in late 2009 is proactive and appropriate to WB and IMF estimates, it also create a need to find out factors that prevent the currency crisis in Vietnam. Moreover, the World Economic Forum 2010 supposed that the 2008 financial crisis entailed the 2009 economic crisis and predicted that some social crisis would take place in 2010 if the world economic recovery was unsustainable. Theories of currency crisis suggest that economic and institutional variables could be employed in Early Warning Systems (EWS) to predict the currency crisis and work out policies to prevent it on the ground of these economic and institutional indicators. This research is to integrate six economic factors of a model introduced by Berg and Pattillo (1999b) from the IMF (BP) and six institutional factors from Worldwide Governance Indicators (Kaufmann, et al., 2008). In the past, researches on early warnings against the currency crisis usually concentrated on economic factors and ignored institutional ones in their quantitative model. Six economic variables comprise domestic currency overvalued against foreign ones, fall in foreign exchange reserve, fall in export, current account deficit, ratio of short-term foreign debt to foreign exchange reserve, and growth of domestic credit. Six institutional variables are voice and accountability, political stability, government effectiveness, regulatory quality, rule of law and control of corruption. The two groups of variables are integrated into the EWS by employing the simple logit model with data source produced by 15 emerging economies over the period 1996-2005. The new finding of the research is that improvement in voice and accountability has significant effect on diminution in danger of currency crisis. In addition, “regulatory quality” produces the same effect but at a lower level. The research also reaffirms prolonged growth of domestic credit, fall in export and current account deficits increases the danger of currency crisis. Finally, our team offers some suggestions on macroeconomic policies with a view to enhancing quality of economic and institutional variables and reducing the danger of currency crisis in Vietnam. "

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