This research tries to find the degree of misalignment of VND by estimating
short run and long run equilibrium effective real effective exchange rate (EREER)
of VND. By using Engle-Granger (1987) two-step cointegration approach, we
identify that trade openness, government expenditure, domestic credit and net
foreign assets are important determinants of REER of VND. In general, the REER
of VND fluctuates around its long-run equilibrium and the misalignments
movement can be classified into 3 periods: in 2000-2003, VND is undervalued; in
2003-2007, VND is overvalued; and in 2007-2010, VND fluctuates dramatically
in overvalued tendency. Based on our findings, we suggest some
recommendations for reducing nominal and real exchange rate gap and narrowing
misalignments, creating a stable exchange rate, promoting long run
competitiveness of the economy and attracting the investors.