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Abstract
This research aims to analyze the effect of the real effective exchange rate on the trade balance in Vietnam using Vector Autor Regressive (VAR) model applying for quarterly data from 2000 to 2016. The tests of the impulse response function investigate that there exists a J-curve for Vietnam. The J-curve effect lasts about six quarters, which implies that the trade balance needs at least six quarters to improve after real depreciation of the domestic currency. The results of variance decomposition also show that real effective exchange rate plays the most critical role in the trade balance fluctuation since the fifth quarter till the long run, whereas, consumer price index has the second impact on the trade balance, foreign direct investment and gross domestic product seem not to much effect on the trade balance. Based on the results, the author gives some policy recommendations on improving the trade balance, including moving to a flexible exchange rate and coordinating between exchange rate policy and other macro policies.
Highlights
In an open economy, the exchange rate is significantly one of the most important macroeconomic variables and has considerable effects on the inflation rate, the international competitiveness on trade performance and investment, the financial stability, and the economic growth as a whole
All of them are stationary in the first different form, in estimation the autoregressive model we use the first different form of all variables to test the impulse response function and the variance decomposition in order to merely analyze the effects of change in each variable to other variables in percentage
0.05 relation between the variables at 5% significant level from both Trace test and Max-eigenvalue test (Table 5), so the Vector Error correction model (VECM) cannot be used for estimation, The research will continue with Vector Autor Regressive (VAR) model estimation in which variables are in first different level and optimal lag length is 4
Summary
The exchange rate is significantly one of the most important macroeconomic variables and has considerable effects on the inflation rate, the international competitiveness on trade performance and investment, the financial stability, and the economic growth as a whole. The exchange rate regime has gradually evolved from a system of multiple exchange rates to a single announced fixed rate, to the current system incorporating a narrow adjustable band around the official rate Through these changes, the exchange rate has been considered in a way that contributes to the achievement of national economic objectives in Vietnam. Studying the relationship between trade balance and the exchange rate is especially important for many developing economies, where trade balance faces deficit problem. As a world trade organization (WTO) member involved in the process of international economic integration, Vietnam has faced many challenges, including the problem of trade deficit. The behavior of the exchange rate, whether identified by exogenous or endogenous shocks, or by policy, is a widespread policy issue but still controversial in most countries
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