Biến động tỷ giá thực đa phương và cán cân thương mại Việt Nam
Kỷ yếu Hội thảo quốc tế “Thương mại và phân phối” lần 2 năm 2020
THE VOLATILITY OF REAL EFFECTIVE EXCHANGE RATE AND THE
BALANCE OF TRADE IN VIETNAM
BIẾN ĐỘNG TỶ GIÁ THỰC ĐA PHƯƠNG VÀ CÁN CÂN THƯƠNG MẠI VIỆT NAM
Nguyen Thi My Linh1
1University of Finance - Marketing; [email protected]
Nguyen Thi Kim Lien2
2Industrial University of Ho Chi Minh City; [email protected]
Abstract
The study was conducted with the objective of examining the impact of real effective exchange rate
volatility on trade balance in Vietnam during the period of 2002 - 2019 at the quarterly frequency. The VAR
model was used to achieve the proposed research objective. The volatility of real effective exchange rate
(vol_reer) is calculated through the GARCH (1,1) model based on the quarterly data on real effective exchange
rate (reer) of the Vietnamese currency with 143 major trading partners of Vietnam. The research results show
that the current trade balance is negatively affected by the volatility of the past trade balance with the lag from
1 quarter to 4 quarters and the volatility of real effective exchange rate with the lag of 2 reduces the trade
balance in Vietnam. These results are considered to be a new point in the study and different from other
published studies, which is country-specific because Vietnam is pursuing a floating exchange rate policy under
the control of the State.
Keywords: Volatility, trade balance, real effective exchange rate (REER), VAR, Vietnam.
Tóm tắt
Bài nghiên cứu được thực hiện với mục tiêu kiểm định tác động của biến động tỷ giá thực đa phương
đến cán cân thương mại tại Việt Nam giai đoạn 2002-2019 theo tần suất quý. Mô hình VAR được các tác giả sử
dụng để giải quyết mục tiêu nghiên cứu đã đề ra. Biến động tỷ giá (vol_reer) được tính toán bằng mô hình
GARCH(1,1) dựa trên dữ liệu tỷ giá thực đa phương (reer) hàng quý của đồng tiền Việt Nam với 143 đối tác
thương mại chính của Việt Nam. Kết quả nghiên cứu cho thấy, cán cân thương mại ở kỳ hiện tại bị tác động tiêu
cực bởi những biến động của cán cân thương mại trong quá khứ, với độ trễ từ 1 quý đến 4 quý, biến động tỷ giá ở
độ trễ 2 làm sụt giảm cán cân thương mại tại Việt Nam, đây là điểm mới trong nghiên cứu, khác hẵn so với các
nghiên cứu khác đã công bố, nó mang tính đặc thù tại Việt Nam, quốc gia đang theo đuổi chính sách tỷ giá thả
nổi có sự quản lý của Nhà nước.
Từ khóa: Biến động, cán cân thương mại (trade of balance), tỷ giá thực đa phương (REER), VAR, Việt
Nam
1. Introduction
According to Alfred Marshall and Abba Lerner (the Marshall-Lerner condition), currency
devaluation has a positive impact on the trade balance. Currency devaluation leads to a decline in the
price of nominal exports in foreign currencies; therefore, the demand for goods of foreigners will
increase, facilitating exports. Simultaneously, currency devaluation makes the price of nominal
imports in domestic currency relatively higher, reducing the demand for imports of local people.
However, the net effect of devaluation on the balance of payments depends on price elasticities. For
the Marshall-Lerner condition to work, the absolute value of the sum of the two price elasticities of
exports and imports must be greater than one. If the exports are elastic with respect to price, the
increase in their quantity demanded will be greater than the decrease in price; therefore, the export
turnover will increase. Similarly, if the imports are price elastic, the import expenditure will decrease.
Both of these factors contribute to the improvement of the trade balance.
Most empirical studies show that goods are not often price elastic in the short run, because
consumption habits cannot change easily. For this reason, in the short run, the Marshall-Lerner
condition is not met, which leads to the fact that currency devaluation only worsens the short-run trade
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balance. In the long run, when consumers adjust their personal consumption habits to new prices, the
trade balance is improved. The fact from the empirical studies shows that the impact of exchange rate
volatility on the trade balance in countries is not the same. Specifically, the studies undertaken by
Himarios (1989), Koray and Lastrapes (1989), Baharumshah (2001), Cao-Alvira (2014), Dogru, Isik
and Sirakaya-Turk (2019) show that exchange rate volatility has an impact on the trade balance in the
studied countries. In Vietnam, Do Thi Man (2017) concludes that real effective exchange rate has an
impact on Vietnam's trade balance in the long run (with the lag of 5 periods). This conclusion is based
on a study with a database of bilateral nominal rate and CPI of 20 major trading partners of Vietnam.
In agreement with Do Thi Man (2017), Nguyen Thi Van Nga (2018) also believes that there exists a
long-run relationship between exchange rate volatility and Vietnam's trade balance in the research
period from 2000 to 2006, based on the real effective exchange rate database of Vietnam and 14 major
trading partners. However, some other authors did not find statistical significance when examining the
impact of exchange rate volatility on the trade balance, such as Singh (2014) in India, Yol and
Baharumshah (2007) in Ghana, Morocco and Senegal, Celik and Kaya (2010) in Turkey, etc. As a
result, these researchers have not yet reached a consensus on the impact of exchange rate volatility on
the trade balance.
In Vietnam, the country has experienced a long time with trade deficit and frequent trade
balance deficits. In order to stabilize the macro-economic situation, the exchange rate policy that
Vietnam is pursuing is to float the exchange rate under the control of the State. Accordingly, the State
intervenes in the exchange rate by adjusting the increase or decrease in the amplitude of the exchange
rate in line with the orientation of the State, represented by the State Bank of Vietnam. With such an
exchange rate regime, does the exchange rate volatility have a certain effect on the trade balance? In
order to find the answer to the impact of exchange rate volatility in the context of applying the real
effective exchange rate of the Vietnamese currency with 143 major trading partners of Vietnam on the
trade balance in the period of 2002 - 2019, the authors conducted this study. The research results help
policy makers to have a more comprehensive view and have a reasonable exchange rate management
policy in order to improve the trade balance in Vietnam.
2. Literature Review
2.1. The impact of exchange rate volatility on the trade balance
Himarios (1989) assessed the impact of the nominal exchange rate on the trade balance in a 27-
country sample over the period of 1953 - 1984. The study found the evidence that the nominal
exchange rate has the effect of adjusting the trade balance.
Koray and Lastrapes (1989) used VAR models to investigate the impact of real exchange rate
volatility on US bilateral imports from the United Kingdom, France, Germany, Japan and Canada. The
result shows that the shocks of one-period exchange rate volatility tend to have inconsiderable negative
impacts on imports in the first 12 months. In other cases, a constant shock of exchange rate volatility
leads to a decrease in imports. This negative effect is consistent with the common assumption that
exchange rate volatility has a negative impact on trade.
Baharumshah (2001) identified the main economic factors that influence the trade balance of
Malaysia and Thailand with the two main partners, the US and Japan. The study used VAR model with
quarterly frequency data from Quarter 1 of 1980 to Quarter 4 of 1996. The study found that the real
effective exchange rate is an important variable affecting the trade balance and devaluation improves
the trade balance in the long run. The devaluation of the ASEAN currencies improves the trade
balance with the US and Japan. Similarly, Narayan (2004) using the variable of real effective exchange
rate also found that the devaluation of the domestic currency improves the trade balance of New
Zealand in the long run.
Cao-Alvira (2014) assessed the short-run and long-run effects of real exchange rate volatility
on Colombian bilateral trade balance of commodities and non-commodities with its main trading
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partners, Germany, Belgium, China, the US, and Switzerland. The research results show that in the
short run, Colombian non-commodity trade responds higher to exchange rate volatility than
commodity trade.
Do Thi Man (2017) examined the real effective exchange rate and the trade balance in Vietnam
in the period of 2000 - 2016 using the VAR model. The study used the variable of real effective
exchange rate calculated from the data on bilateral nominal exchange rate and CPI of 20 major trading
partners of Vietnam. The results confirm that real effective exchange rate has an impact on Vietnam's
trade balance in the long run (with the lag of 5 periods).
Nguyen Thi Van Nga (2018) used the time series data from 2000 to 2006 to assess the impact
of exchange rate volatility on Vietnam's trade balance. The study utilized the ARCH model to calculate
real exchange rate volatility based on the data on real effective exchange rate of Vietnam and 14 major
trading partners. The research results show that there exists a long-run relationship between exchange
rate volatility and Vietnam's trade balance.
Dogru, Isik and Sirakaya-Turk (2019) measured the impact of exchange rate volatility on the
US bilateral tourism trade balance with Canada, Mexico and the United Kingdom through the ARDL
technique. The research results show that the depreciation of the US dollar improves the US trade
balance with all three trading partners.
2.2. There is no comprehensive statistical evidence on the impact of exchange rate volatility on the
trade balance
Hooper and Kohlhagen (1978) considered the effect of bilateral nominal exchange rate
volatility on the US and Germany bilateral trade balance in the period of 1969 - 1975. The research
results show that exchange rate volatility has a significant impact on commodity prices but it does not
significantly affect the total volume of the trade balance. Specifically, the increase in the exchange rate
volatility increases the variance of profits and moves the demand curve down, leading to a decrease in
the quantity and prices of commodities. The exchange rate volatility only affects the trade balance
without hedging exchange rate risks. Thus, if international partners are concerned about exchange rate
risks and conducting hedging risks, there is not enough basis to conclude that exchange rate volatility
reduces the trade balance.
Wilson (2001) examined the relationship between the real trade balance and the real exchange rate
for bilateral trade in merchandise goods amongst Singapore, South Korea, Malaysia, the US and Japan on
a quarterly basis over the period from 1970 to 1996. With the exception of Korean trade with the US, the
findings suggest that the real exchange rate does not have a significant impact on the trade balance.
Singh (2004) analyzed the impact of exchange rate volatility on the trade balance in India based
on the quarterly data from Quarter 2 of 1975 to Quarter 3 of 1996. The study found no statistically
significant evidence of the effects of exchange rate volatility on the trade balance in India.
Yol and Baharumshah (2007) examined the impact of exchange rate on the bilateral trade balance
of 10 African countries with the US, using the FMOLS regression technique with the annual data over
the period of 1977 - 2002. The research results show that there was no statistically significant evidence
of the impact of exchange rate volatility on the trade balance in Ghana, Morocco and Senegal.
Ikelik and Kaya (2010) analyzed the factors affecting Turkey's bilateral trade with respect to a
panel of seven partner countries. The study shows that the impact of exchange rate on Turkey's trade
balance with different partners is inconsistent and country-specific.
3. Research methodology
During the past time, the studies on the relationship between exchange rate and the trade
balance in the world are very diverse and plentiful in data and research models. In general, the studies
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used ARDL, VAR, VECM techniques and OLS or FMOLS tests to measure the impact of exchange
rate on a country's parallel trade balance with selected partners.
For the variables used in the research model, in the period before 2000, there were several
studies using the variable of nominal exchange rate, such as Hooper and Kohlhagen (1978); Himarios
(1989). Later, many studies used the variable of real exchange rate, mainly bilateral real exchange rate
(for example, Dogru, Isik and Sirakaya-Turk, 2019; Wilson, 2001; Yol and Baharumshah, 2007; Çelik
and Kaya, 2010) and real effective exchange rate (Baharumshah, 2001; Narayan, 2004; Do Thi Man,
2017) in the research model. In particular, Do Thi Man's (2017) study on the relationship between real
exchange rate and Vietnam's trade balance used the variable of real effective exchange rate (REER)
which was calculated from the data on bilateral nominal exchange rate and CPI of 20 major trading
partners of Vietnam. Within the scope of this study, the authors applied the VAR model to estimate the
impact of exchange rate volatility on Vietnam's trade balance with the new point of using the variable
of real effective exchange rate (REER) of the Vietnamese currency with 143 major trading partners of
Vietnam. According to Crowley and Lee (2003), the authors calculate the index of real effective
exchange rate volatility (vol_reer) based on the quarterly data on real effective exchange rate, by using
the following GARCH (1,1) model:
(1)
(2)
(3)
Where:
vol_reert : real exchange rate volatility
ut
: random error
ht
: variance of real exchange rate
4. Research model
The purpose of this study is to measure the impact of exchange rate volatility on the trade
balance in Vietnam in the period of 2002 - 2019, with the quarterly frequency data. Based on the VAR
model on the relationship between exchange rate and the trade balance of previous studies such as
Baharumshah (2001), Narayan (2004), Do Thi Man (2017), the research model is as follows:
(4)
Where:
• vol_reer : real effective exchange rate volatility
• tb
: Vietnam’s trade balance
Table 1. Variables used in the research model
Variable
code
Source of
data
Variable name
Definition
Vietnam’s
Previous studies
real effective
exchange rate
volatility
real
Koray and Lastrapes (1989); Singh (2004);
vol_reer effective exchange
Bruegel Cao-Alvira (2014); Nguyen Thi Van Nga
(2018)
rate volatility
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Hooper and Kohlhagen (1978); Himarios
(1989); Wilson (2001); Baharumshah (2001);
Narayan (2004); Yol and Baharumshah
(2007); Çelik and Kaya (2010); Do Thi Man
(2017); Dogru, Isik and Sirakaya-Turk (2019)
General
Statistics
Office of
Vietnam
Vietnam’s trade
balance (export –
import)
tb
Trade balance
Source: The authors’ synthesis
5. Research results and discussion
5.1. Calculation results of real exchange rate volatility using the GARCH (1,1) model
Figure 1. The volatility of real effective exchange rate in Vietnam in the period of 2002 - 2019
Source: The authors’ analysis results
In general, the real effective exchange rate in Vietnam during the period of 2002 - 2019 was
steady in most phases, except for the phase of the global financial crisis in 2008 and 2009 with the
largest volatility in Quarter 1 of 2019 (0.18 %). After the crisis, the exchange rate volatility was
relatively stable and slightly increased in Quarter 2 of 2015 (0.10%).
5.2. Tests
Stationarity test of variables
The study used Dickey-Fuller test (Dickey and Fuller, 1979) to test the stationarity of data
series. With the hypothesis H0: the data series is not stationary.
Table 2. Dickey-Fuller test for unit root
Variable
vol_reer
tb
Original data series
0.0014***
0.0181**
Note: *, ** and *** indicate significance at the 10%, 5% and 1% levels, respectively.
Source: The authors’ analysis results
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The stationarity test results showed that both data series stopped at the original data series.
Determine the optimal lag
Table 3. Determine the optimal lag of variables
Selection-order criteria
Number of obs = 66
Sample: 5 - 70
Lag
LL
LR
df
p
FPE
AIC
HQIC
SBIC
0
1
2
3
4
-148.35
-103.87
0.326377
0.095728
0.104628
0.090644
0.086432*
4.55605
3.32939
3.41783
3.27334
3.22394*
4.58227
3.40804*
3.54893
3.45687
3.45992
4.6224
3.52845*
3.7496
88.96
4
4
4
4
0.000
0.706
0.002
0.024
-102.788
-94.0202
-88.3901
2.1626
17.537
11.26*
3.73781
3.82112
Source: The authors’ analysis results
According to the results of testing the optimal lag, the criteria LR, FPE, AIC showed that the
model had an optimal lag of 4.
Cointegration test
Table 4. Johansen test for cointegration
Number of obs = 67
Lags = 3
Trend: constant
Sample: 4 - 70
parms
LL
eigenvalue
Trace statistic
25.2622
maximum rank
5% critical value
15.41
10
13
14
-108.00404
-97.890287
-95.372913
.
0.26053
0.07246
0
1
2
5.0399
3.76
Source: The authors’ analysis results
The results of the cointegration test showed that there was no cointegration in the long run in
the data series; therefore, the authors used the VAR model with the optimal lag of 4 in the study (Engle
and Granger, 1987).
5.3. Research results and discussion
Table 5: Results of assessing the impact of exchange rate volatility on the trade balance
Δ tb
Variable
Regression coefficient
Significance level
Constant
Δtb(-1)
Δtb(-2)
Δtb (-3)
303.9913
0.609
0.7005414
0.2552627
-0.5224003
0.3634498
613225.6
0.000***
0.089*
0.002***
0.010**
0.567
Δtb (-4)
Δvol_reer(-1)
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Δvol_reer(-2)
Δvol_reer(-3)
Δvol_reer(-4)
-2233810
1512791
0.067*
0.178
0.457
-693200.4
Note: *, ** and *** indicate significance at the 10%, 5% and 1% levels, respectively.
Source: The authors’ analysis results
After testing the VAR model, the authors performed the autocorrelation test and the stability of
the model. The test results showed that there was no autocorrelation between the residuals and the
solutions are in the unit circle; therefore, the VAR model with the lag of 4 is stable and suitable.
The impulse response function of the past "tb" variable to the current "tb" variable showed that the
current trade balance was affected by the volatility of the past trade balance (with the lag from 1 quarter to
4 quarters). The strongest impact level was in the lag from 1 quarter to 2 quarters and decreased gradually
in the lag from 3 quarters to 4 quarters. After that, the trade balance gradually recovered and stabilized
(figure 2).
irf1, tb, tb
1
.5
0
0
2
4
6
8
step
95% CI
impulse response function (irf)
Graphs by irfname, impulse variable, and response variable
Figure 2. The impulse response of the past "tb" variable to the current "tb" variable
The research results also showed that the variable Δvol_reer (-2) had a negative impact on the
variable Δtb at the statistically significant level of 10%. Specifically, the exchange rate volatility with
the lag of 2 reduced Vietnam’s trade balance. The results are supported by previous studies such as
Koray and Lastrapes (1989); Cao-Alvira (2014); Nguyen Thi Van Nga (2018). The study indicated
that Vietnam's trade balance had significant responses to real effective exchange rate volatility.
Therefore, in addition to other macroeconomic policies, Vietnam needs to pay attention to the
adjustment of appropriate exchange rate policies in order to stabilize exchange rate and reduce real
effective exchange rate volatility to contribute to the improvement of the multilateral trade balance
with the partners around the world.
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irf1, vol_reer, tb
2000000
0
-2000000
-4000000
0
2
4
6
8
step
impulse response function (irf)
95% CI
Graphs by irfname, impulse variable, and response variable
Figure 3. The impulse response of the variable "vol_reer" to the variable "tb"
6. Conclusion
With the objective of testing the impact of the real effective exchange rate volatility of the
Vietnamese currency with 143 major trading partners on the balance of trade in Vietnam. The paper
used the vector autoregression (VAR) model to clarify the problem. The research results show that real
effective exchange rate volatility has a negative impact on the trade balance with the lag of 2 quarters.
This result is the evidence for the appropriate exchange rate policy that Vietnam is pursuing, the
floating exchange rate policy under the control of the State. In theory, the floating exchange rate
regime is better, but in reality, most currencies are not fully floating because there is too much
instability. However, although the fixed exchange rate regime creates stability, the solution is quite
difficult and expensive, and this regime makes the monetary policy become invalid. As a result, most
of the world’s currencies are floating, but the government will intervene at a "critical" moment so that
the exchange rate does not fully respond to the market, contributing to economic growth as well as
achieving inflation control targets.
In Vietnam, the foreign exchange market has not yet been able to respond to the complete
floating, and the governmental intervention to keep the exchange rate relatively stable is necessary.
The research results of the authors support this view. With the lag of 2 quarters, exchange rate
volatility reduces the trade balance, and with the lag of 1 quarter, the trade balance has not been able to
respond to exchange rate volatility; however, until the 3rd quarter onwards, the exchange rate
mechanism promptly changes to stabilize the trade balance. Therefore, Vietnam needs to pay attention
to adjusting the exchange rate appropriately to stabilize the exchange rate and reduce the real effective
exchange rate volatility in order to contribute to the improvement of the multilateral trade balance with
trading partners. The results of this paper also find that the current trade balance is affected by the
volatility of the past trade balance with the lag from 1 quarter to 4 quarters. The research results are the
basis for policy makers, regulators, as well as researchers to clearly see the impact of exchange rate
volatility on the trade balance in Vietnam. However, the study also faces some limitations;
specifically, some control variables that can affect Vietnam's trade balance are not mentioned, the data
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to be included in the study is quite short due to Vietnam’s characteristics of data, and so on. This is
also the research direction for further studies.
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