Exchange Rate, Trade Balance, and the J-Curve Effect in Vietnam

Abstract

The aim of this study is to analyse movements of exchange rate and trade balance during 2001-2015 and investigate whether a devaluation would improve the trade balance by a J-curve effect. The study uses quarterly data collected from reliable sources such as World Bank (WB), and General Statistic Office of Vietnam (GSO), and International Financial Statistics (IFS). The first part of the study shows the performance of the trade balance and exchange rate movements during the given period. The second part employs Impulse Response analysis to examine the pattern of the trade balance after a shock of exchange rate or a devaluation. The finding of the study is that following a devaluation, the trade balance deteriorates in the first two-quarters and then starting improving till the sixth quarter. After the six quarter, the trade balance again falls into deficit and followed by rises and declines unexpectedly. With responses illustrated from the analysis, the trade balance has a sign of the J curve in early quarters but this sign is fading in later quarters. The study also discovers that there is a possibility that after a shock of exchange rate, the trade balance will follow an S curve, instead of a J curve. In the end of the study, the author recommends some policy implications to improve trade balance and open further insights for subsequent researchers.