Trade balance shock and its importance on Gross National Saving Rate and Exchange Rate: A VAR analysis using time series national data for Japan

Abstract

This research focuses on investigating the dynamic network among trade balance (TB), the Gross national saving rate (GNSR), and the exchange rate (ER) in Japan. The study used time series data from 1981 to 2019. The research conducts a vector auto-regression (VAR) to investigate the dynamic relationship in the series. The first step started with a unit root test to check the stationarity. The data series is stationary at first difference. Further, we employed Johansen co-integrated analysis, Granger causality, an impulse variance analysis followed by variance decomposition. The result shows the unidirectional Granger causal relationship between TB and ER. Its own shock explains that TB’s contribution is 73% and GNSR & ER contributes 25.67 and 0.67 to TB, respectively. The GNSR variance decomposition describes 95.12 variations by its own innovative shock, and ER shows a 52% change in the variable from its own shock. This study establishes that trade balance is significant to exchange rate growth in Japan. This research is original work, and it will contribute the knowledge about the trade balance, gross national saving rate, and exchange rate behaviour & effect to each other. This research focuses on investigating the dynamic network among trade balance (TB), the Gross national saving rate (GNSR), and the exchange rate (ER) in Japan. The study used time series data from 1981 to 2019. The research conducts a vector auto-regression (VAR) to investigate the dynamic relationship in the series. The first step started with a unit root test to check the stationarity. The data series is stationary at first difference. Further, we employed Johansen co-integrated analysis, Granger causality, an impulse variance analysis followed by variance decomposition. The result shows the unidirectional Granger causal relationship between TB and ER. Its own shock explains that TB’s contribution is 73% and GNSR & ER contributes 25.67 and 0.67 to TB, respectively. The GNSR variance decomposition describes 95.12 variations by its own innovative shock, and ER shows a 52% change in the variable from its own shock. This study establishes that trade balance is significant to exchange rate growth in Japan. This research is original work, and it will contribute the knowledge about the trade balance, gross national saving rate, and exchange rate behaviour & effect to each other.