The Rationale of Exchange Rate Policies in Vietnam Under French Rule

Exchange Rates and Exchange Rate Policies

in Vietnam Under French Rule, 1878-1945 *

Jean-Pascal Bassino **

and

Hironobu Nakagawa ***

Abstract

Although the French franc, a gold standard currency before 1914, and between 1929 and 1936, was the sole legal tender within the framework of the French colonial Empire, Vietnam was an exception. This country, along with the other territories which were part of French Indochina, had a separate national currency, the piastre, established in 1878, which was not pegged to the franc until 1930. The purpose of this paper is to investigate the rationale and effectiveness of exchange rate policies in Vietnam, considered as a representative case of a small open Asian economy in the context of pre-Bretton-Woods exchange rates instability in Asia. As a country deeply integrated in intra-Asian trade, but also receiving manufactured goods, loans and private investments from France and other European countries, Vietnam was concerned about the fluctuations of exchange rates both in the East and the West. Our study relies on the collection of a comprehensive set of nominal exchange rates of the piastre against the main Western and Asian currencies (yearly average series from 1878 to 1945, and monthly average between 1923 and 1940). Stylised facts on long run evolution suggest that the piastre exchange regime based on the silver standard was, surprisingly, an efficient arrangement before 1930. In addition, cointegration tests on bilateral exchange rates indicate that the franc-peg, introduced in 1930, was rather a disappointing policy.

Contents

Introduction

I. Institutional context and methodology

II. The rationale of exchange rate policies in Vietnam under French rule

III. Long and short run patterns of bilateral nominal exchange rates of the piastre

IV. Econometric assessment of the impact of the 1930 franc-peg policy

Summary and conclusion

* Paper presented at the Asian Historical...