In the last few years, Vietnam'smacroeconomic situation has followed a predictable pattern.When faced with external shocks the authorities have optedto protect the country's rapid growth rate, even if itmeant tolerating higher levels of macroeconomic instability.This has meant modest growth slowdowns and frequent episodesof overheating. So when the economy started to overheat inlate 2010 following the delayed withdrawal of the fiscal andmonetary stimulus put in place in 2009, few expected adetermined response from the government to stem the ensuingmacroeconomic volatility. The current episode ofmacroeconomic instability has been as severe as the previousoverheating episode of mid-2008. The author constructed asummary measure of macroeconomic instability, Vietnam Indexof Macroeconomic Stability (VIMS), based on the movement offour variables, namely nominal exchange rate, internationalreserves, inflation rate and nominal interest rate. Ourmeasure shows that the degree of macroeconomic instabilityduring the current episode did come quite close to mid-2008,but has not surpassed it yet. But unlike 2008, when thelevel of instability increased sharply and fell immediately,instability has persisted over a longer period of timeduring the current episode, from November 2010 to February2011, exposing Vietnam's economy to a prolonged periodof nervousness and uncertainty.
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