Exchange Rate and Trade Balance in Vietnam: A Time Series Analysis

Abstract

The aim of the study is to investigate the relationship of exchange rate and trade balance in Vietnam by a time series analysis from 2001-2015. The study employs various models such as Autoregressive Distributed Lag Models (ARDL), Wald test, Error Correction Model (ECM), Granger Causality, Vector Autoregressive Model (VAR) and Impulse Response analysis. Estimation of the long-run model using quarterly data for the period 2001-2015 provides evidence that a real depreciation of VND will worsen the trade balance. In the short run, the VAR model shows evidence to support that there is no short-run relationship between exchange rate and trade balance and suggest that the whole model will get adjusted at the speed of 55.21% to get the long-run equilibrium. Besides, Granger Causality test shows that the trade balance also has the inverse impact on the exchange rate movements. Finally, the Impulse Response analysis implies that the J-curve pattern of the trade balance after a shock in real depreciation/devaluation does exist but is not very clear. These findings help the policymakers enhance exchange rate and trade policies based on specific Vietnam case to improve trade balance in future. The value of this study is that it opens new insights for subsequent researchers in which there might have more than three important factors that have mentioned in theory base affecting trade balance.