Exchange Rate and Trade Balance in Vietnam: A Time Series Analysis

Abstract

The aim of the study is to investigate the relationship of exchange rate and trade balance in Vietnam by a time series analysis from 2001-2015. The study employs various models such as Autoregressive Distributed Lag Models (ARDL), Wald test, Error Correction Model (ECM), Granger Causality, Vector Autoregressive Model (VAR) and Impulse Response analysis. Estimation of the long-run model using quarterly data for the period 2001-2015 provides evidence that a real depreciation of VND will worsen the trade balance. In the short run, the VAR model shows evidence to support that there is no short-run relationship between exchange rate and trade balance and suggest that the whole model will get adjusted at the speed of 55.21% to get the long-run equilibrium. Besides, Granger Causality test shows that the trade balance also has the inverse impact on the exchange rate movements. Finally, the Impulse Response analysis implies that the J-curve pattern of the trade balance after a shock in real depreciation/devaluation does exist but is not very clear. These findings help the policymakers enhance exchange rate and trade policies based on specific Vietnam case to improve trade balance in future. The value of this study is that it opens new insights for subsequent researchers in which there might have more than three important factors that have mentioned in theory base affecting trade balance. Contribution/ Originality:This study investigates the relationship between exchange rate and trade balance of Vietnam case based on a time series analysis over the period of 2001-2015. INTRODUCTIONEconomic theories suggest that exchange rate and trade balance have a permanent relationship. On the one hand, exchange rate volatility has a great impact on trade balance through relative price channel. Franke (1991) finds out that under very standard conditions, an enterprise might be beneficial from increased fluctuation and therefore result in a boost in the volume of their exports. Sercu (1992) also demonstrates that exchange rate fluctuation can improve trade since it enhances the prospect that the price a trader receives might outweigh trade costs. Broll and Eckwert (1999) draw a conclusion that volatility increases the value of a trader's option to export, as this risk raises the potential gains from trade, the trade volume will improve accordingly.On the other hand, the volume of trade influences exchange rates through its effect on the supply of and demand for the foreign currency. According to supply and demand theory of foreign currency, Tien (2011) Asian Economic and Financial Review

Macroeconomic factors and trade balance: An analysis of Vietnam's relations with RCEP countries

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Determinants of Trade Balance in Vietnam During 1997-2015

“…The multiplier approach applies to small open economies. This is the so-called multiplier without foreign repercussions, which implies that exports are considered as the exogenous variable [5][6]. It is supposed that the balance of trade moves from the equilibrium due to an increase in exports, leading to a trade surplus.…”

Which Stock Exchange Leads the Other: Comparison Between US, Australia, Euro Zone and UK

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