Case Study: Vietnam, the Dong, and the Trilemma
This case applies the open-economy trilemma to a small open economy. The State Bank of Vietnam (SBV) runs a managed float. The mechanism was set out in Decision 2730/QĐ-NHNN dated 31 December 2015 and took effect on 4 January 2016, with a first central rate of about 21,896 VND per US dollar. Each business day the SBV sets a daily central reference rate (the *tỷ giá trung tâm*) for the dong against the US dollar from three inputs, namely the prior day’s weighted-average interbank rate, movements in a basket of major trading-partner currencies, and domestic macroeconomic and monetary conditions. Authorised banks trade within a band around that central rate, set at ±3% from 2016 and widened to ±5% on 17 October 2022 under Decision 1747/QĐ-NHNN. Alongside the band, the SBV uses capital-flow management (the dong is not freely convertible) and foreign-exchange reserves to lean against pressure. The IMF classifies the de jure regime as managed floating and the de facto regime as a stabilised arrangement. The case illustrates how a country can hold exchange-rate stability and a degree of monetary autonomy by accepting limits on free capital mobility.
Why it matters
The trilemma says a country can pick at most two of three goals, namely a stable exchange rate, independent monetary policy, and free capital movement. Vietnam leans toward the first two. Keeping the dong stable while still setting domestic interest rates means the SBV cannot also let capital flow without friction, so it manages the capital account and intervenes with reserves. The daily central rate plus a band is the visible compromise. It permits gradual adjustment rather than a hard peg or a free float.
Worked examples
Foreign investors suddenly want to move large sums out of Vietnam, pushing the dong toward the weak edge of the ±5% band. List two levers the SBV can use to defend exchange-rate stability, and name the trilemma corner it is giving up.
The SBV can sell foreign-exchange reserves to buy dong and can tighten capital-flow management on outflows. It can also nudge the daily central rate. By prioritising a stable rate plus domestic policy control, it accepts the trilemma cost of less than free capital mobility.
The US Federal Reserve raises rates sharply, as in 2022, widening the gap with Vietnamese rates and pressuring the dong. Why might the SBV widen the trading band rather than abandon the managed float?
A wider band (the move to ±5% on 17 October 2022) lets the dong absorb more of the shock through price, easing the drain on reserves, while the SBV still anchors expectations through the daily central rate. It preserves exchange-rate stability and monetary autonomy without fully floating or fully fixing.
Common mistakes
- ✗The dong is pegged to the US dollar. It is not a hard peg. The SBV sets a daily central rate against a basket of eight currencies and allows movement within a band, which is a managed float.
- ✗Vietnam has fully free capital flows like a major reserve-currency economy. The dong is not freely convertible and capital-account transactions are managed, which is exactly the trilemma corner Vietnam gives up.
- ✗A managed float means the central rate never moves. The central rate is reset every business day and the band has been widened over time, so the regime allows gradual, controlled adjustment.
Revision bullets
- •SBV runs a managed float, namely a daily central reference rate (since 4 January 2016) plus a spot trading band (±5% from 17 October 2022)
- •The IMF classifies the de jure regime as managed floating and the de facto regime as a stabilised arrangement
- •Trilemma choice: exchange-rate stability and some monetary autonomy, paid for with capital-flow management and the use of foreign-exchange reserves
Quick check
Under the trilemma, which corner does Vietnam most clearly give up to keep both a stable dong and domestic monetary control?
What best describes the State Bank of Vietnam’s exchange-rate mechanism since January 2016?
Connected topics
Sources
- IMF (2021), Vietnam 2020 Article IVInternational Monetary Fund. Vietnam: 2020 Article IV Consultation. IMF Staff Country Report No. 21/42, 2021.Classifies Vietnam’s de jure arrangement as managed floating and the de facto arrangement as a stabilised arrangement, and describes the daily central rate and trading-band mechanism.
- OECD (2025), Economic Survey of Viet NamOECD. OECD Economic Surveys: Viet Nam 2025. OECD Publishing, Paris, 2025.Documents the widening of the band to ±5% in 2022, the daily central parity since 2016 based on a basket of eight partner currencies, and the IMF managed-floating classification.