Abstract
The standard two-country model, also referred to as the imperfect substitutes model of international trade, have been the framework of virtually all J-curve research. As the aforesaid model only mentions the bilateral exchange rate between the currencies of the home and the foreign countries, many studies employing it neglect the crucial role of vehicle currency, which cannot detect useful findings especially in the circumstance that the global trade is dominated by only a few currencies such as USD. Some studies utilized that model to explore the impacts of vehicle currencies on trade balance but presumably lacked theoretical basis. This paper is the first to provide the theoretical ground for the usage of standard two-country model to examine the role vehicle currency. In addition, empirical evidence regarding the asymmetric effects of the vehicle currency exchange rate USD/VND and bilateral exchange rate EUR/VND on Vietnam’s trade balance with the whole Eurozone is also reported.
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