The Long Run Relationship between Budget Deficit and Other Macroeconomic Variables in Vietnam, VECM - Cointegration Approach

Abstract

During the process of rapid economic development in Vietnam, the government has confirmed its crucial role of as an active regulator and participant in the market. Nonetheless, it is a common controversy whether the increase in government spending and budget deficit has beneficial influence on the growth of the economy. The paper aims to elaborate the long-run relationship between budget deficit and other macroeconomic variables so as to investigate the impact of deficit on the economic development in Vietnam. The cointegration approach is applied to analyze quarterly data from 2003Q1 to 2012Q4. The result suggests that there exists a long-run relationship between budget deficit and GDP, CPI, Exchange rate (prime), and Money supply (M2). The speed of adjustment from short-run disequilibrium error to long-run equilibrium is higher than 100%, i.e., the correction overshoots the long-run mean in each quarter. Another important result is that the differences in classifying and reporting budget revenues and expenditures can only affect the short run relationship and Granger causality among the investigated variables.