Determinants of the Trade Balance in an Asian Emerging Economy: An ARDL Bounds Testing Approach

Abstract

This study examines the main factors that affect the trade balance in Vietnam, an Asian emerging economy. The ARDL methodology is employed to identify the cointegration and to assess the relationship among variables. The quarterly database is collected in the period of 1995–2020. The bounds test result confirms that there exists a cointegration relationship between the trade balance, national output, money demand, and exchange rate of Vietnam’s economy. Furthermore, in the long run, the national output and money demand are found to have negative and significant effects on the trade balance, whereas the exchange rate has a positive and significant impact on the dependent variable. Additionally, in the short run, the national output has a significant negative impact and the money supply has a significant positive impact on the trade balance, while the lag of the trade balance variable has a significant negative effect on itself. Finally, the J-curve phenomenon is confirmed in Vietnam when the coefficient of the exchange rate is negative in the short run and positive in the long run. The empirical evidence suggests that the government needs to use monetary policy, in particular money supply, as an effective policy tool to support the Vietnamese trade balance in the future.