The impact of exchange rate fluctuation on trade balance in short and long run

MINISTRY OF EDUCATION AND TRAINING UNIVERSITY OF ECONOMICS HOCHIMINH CITY PHAM THI TUYET TRINH THE IMPACT OF EXCHANGE RATE FLUCTUATION ON TRADE BALANCE IN SHORT AND LONG RUN THESIS OF MASTER IN ECONOMICS HO CHI MINH CITY – 2011 MINISTRY OF EDUCATION AND TRAINING UNIVERSITY OF ECONOMICS HOCHIMINH CITY PHAM THI TUYET TRINH THE IMPACT OF EXCHANGE RATE FLUCTUATION ON TRADE BALANCE IN SHORT AND LONG RUN Major: Finance and Banking Major code: 60.31.12 THESIS OF MASTER IN ECONOMICS ACADEMIC SUPERVISOR: Ph.D NGUYEN VAN PHUC HO CHI MINH CITY – 2011 ACKNOWLEDGEMENTS I would like to send special thanks to all the teachers who gave interesting lecture to me for their devoted instruction during my studying in this master course I am specially thankful to Ms Ha Thi Thieu Dao for her precious data without which I could not finish this study and for her carefully reading, editing and detailed comments on my study I express my profound sense of gratitude and sincere thanks to Mr Nguyen Van Phuc, academic supervisor, for suggesting research problems, giving valuable guidance and providing constant encouragement I am particularly indebted to my family, especially my mother and my daughter, who have given me great emotion and encouragement i ABSTRACT This study shows the short and long-run impact of exchange rate on trade balance in Vietnam Following a depreciation of real exchange rate, trade balance initially deteriorates Trade balance will improve after two quarters and new equilibrium will be set after twelve quarters Johansen’s cointegration analysis and autoregressive distributed lag (ADRL) are respectively used to explore long-run impact, giving similar estimation results, showing trade balance improvement following a depreciation Corresponding error correction modes (ECM) based on long-run cointegration equations also come to consistent results, indicating immediate deterioration of trade balance after a depreciation Impulse response functions based on ECM and unrestricted Vector AutoRegression (VAR) exhibit J-curve pattern of trade balance when there is a permanent depreciation Key word: exchange rate and trade balance, cointegration, autoregressive distributed lag, J-curve ii CONTENTS Acknowledgement i Abstract ii Content iii List of tables vii List of figures viii Abbreviations ix CHAPTER 1: INTRODUCTION 1.1 Background to the study and statement of problem 1.2 Research question 1.3 Research objectives 1.4 Methodology 1.5 Limitation 1.6 Organization of the study CHAPTER 2: LITERATURE REVIEW 2.1 General arguments about exchange rate 2.1.1 Exchange rate concepts 2.1.2 Nominal exchange rate and real exchange rate 2.1.2.1 Bilateral nominal and real exchange rate 2.1.2.2 Real effective exchange rate 2.1.3 Main determinants of exchange rate movement 2.1.3.1 Differential in inflation 2.1.3.2 Terms of trade 10 2.1.3.3 Differential in interest rates 10 2.1.3.4 Political stability and economic performance 10 2.1.3.5 Condition of balance of payment 11 2.2 Trade balance concepts 11 2.2.1 Trade balance as an account on the balance of payment 11 2.2.2 Determinants of trade balance 12 iii 2.3 Relationship between exchange rate and trade balance 13 2.3.1 The elasticities approach 13 2.3.1.1 Marshall-Lerner condition 13 2.3.1.2 The J-curve effect 14 2.3.2 Keynesians multiplier approach 15 2.3.3 Theoretical model 16 2.3.4 Empirical evidences 17 2.3.4.1 Brief of empirical studies on developed countries 17 2.3.4.2 Brief of empirical studies on developing countries 18 2.3.4.3 Summary of empirical studies on Vietnam 19 2.4 The role of exchange rate policy to trade balance 20 2.4.1 Exchange rate policy concepts 20 2.4.2 Exchange rate regimes 21 2.4.3 Instruments of exchange rate policy 23 2.4.3.1 Direct instruments 23 2.4.3.2 Indirect instruments 23 2.4.4 The importance of exchange rate policy to trade balance 24 Chapter summary 26 CHAPTER 3: PERFORMANACE OF TRADE BALANCE AND EXCHANGE RATE IN VIETNAM IN 2000-2010 3.1 The background of Vietnam’s economy in 2000-2010 period 28 3.2 The performance of trade balance in 2000-2010 period 30 3.2.1 In terms of value 31 3.2.2 In terms of structure by products 34 3.2.3 In terms of structure by trading partners 36 3.3 The fluctuation of exchange rate in 2000-2010 period 38 3.3.1 Nominal exchange rate under management of The State bank of Vietnam and the role of US Dollar 38 3.3.2 Movement of real exchange rates 41 iv 3.3.2.1 Real exchange rates computation 41 3.3.2.2 Analysis bilateral real exchange rate and real effective exchange rate 44 Chapter summary 48 CHAPTER 4: ESTIMATING THE IMPACT OF REAL EXCHANGE RATE ON TRADE BALANCE IN VIETNAM IN 2000-2010 4.1 Model specification 49 4.2 Data description 50 4.2.1 Technical data description 50 4.2.2 Econometric characteristics of the data 51 4.2.2.1 Seasonality 51 4.2.2.2 Stationarity 52 4.3 Model for estimation 53 4.4 Estimation of long-run effect 54 4.4.1 Johansen’s cointegration analysis 55 4.4.2 Autoregressive distributed lag (ARDL) approach 57 4.5 Estimation of short-run effect 63 4.5.1 Error-correction model (ECM) 64 4.5.2 Impulse response 66 Chapter summary 67 CHATER 5: CONCLUSION AND POLICY RECOMMENDATION 5.1 Conclusion 69 5.2 Policy recommendation 70 5.2.1 Exchange rate policy should take into account trade competitiveness 70 5.2.2 Determining value of VND based on currency basket 73 5.2.3 Establishing condition for a successful depreciation 74 5.2.4 Depreciating currency to improve trade balance 77 5.3 Limitation 78 v REFERENCES 80 APPENDIX A: REER computation 86 APPENDIX B: Estimation output and relevant test for long-run impact of real exchange rate on trade balance 99 APPENDIX C: Estimation output of Johansen’s cointegration test for longrun impact of real exchange rate on exports and imports 102 APPENDIX D: Output of ECM model estimation based on cointegrating equation obtained by Johansen’s procedure and ARDL approach 103 APPENDIX E: Narayan’s new set of critical values for the bound F-test 106 vi LIST OF TABLES Table 2.1 Exchange rate regime classification by IMF 22 3.1 GDP, Inflation, FDI, FII, ODA, Current transfer in 2000-2010 28 3.2 Structure of exports by foreign trade standard in 2000-2010 34 3.3 Structure of imports in 2000-2010 35 3.4 Trade balances (million USD) with 17 largest trading partners 37 3.5 Real exchange rates of some currencies 38 3.6 Fluctuation bands applied from 1999-2010 39 3.7 Nominal exchange rate between VND and USD in 2000-2010 39 3.8 VND/USD RER and REER 44 4.1 ADF and PP tests results for non-stationarity of variables 53 4.2 Correlation matrix of variables 54 4.3 Cointegration Rank Test: Trace and Maximum Eigenvalue Statistics 55 4.4 Granger Causality Test in Vector AutoRegression (VAR) 56 4.5 Statistic of selecting lag order (SBC and AIC) and F-Statisctics for testing the existence of a levels trade balance equation 59 4.6 Estimated ARDL(2,3,0) model 60 4.7 Ramsay RESET test for estimated ARDL(2,3,0) model 60 4.8 Breusch-Godfrey Serial Correlation LM Test for estimated ARDL(2,3,0) model 61 4.9 ECM for trade balance based Johansen’s procedure 64 4.10 ECM for trade balance based on ARDL (2,3,0) 64 4.11 Breusch-Godfrey Serial Correlation LM Test for ECM 65 4.12 Ramsey RESET Test for ECM 65 4.13 Impulse response of trade balance following real exchange rate shock 66 5.1 Shares of main trading partners (percent) of neighboring countries, 2004 72 vii LIST OF FIGURES Figure 2.1 The J-curve effect 15 3.1 The trade balance, current account of Vietnam in 2000-2010 30 3.2 Values of exports and imports (million USD) in 2000-2010 32 3.3 Growth of export and import (percent) in 2000-2010 32 3.4 Trade balance in FOB prices and CIF prices in 2000-2010 33 3.5 VND/USD exchange rate and trade balance in 2000-2010 41 3.6 RER and trade balance 45 3.7 VND/USD RER, VND’s REER and USD’s REER 46 3.8 REER and trade balance with major trading partners 47 4.1 Series used in empirical analysis: TB, REER, GDP,GDP* 51 4.2 Seasonally adjusted series: TB, REER, GDP,GDP* 52 4.3 CUSUM test for estimated ARDL(2,3,0) model 61 4.4 CUSUM Test for ECM 65 4.5 Evolution of trade balance following real depreciation 67 5.1 VND/USD exchange rate and RER, NEER, REER of VND 2000-2010 71 5.2 NEER, REER of some countries 79 viii 2004Q2 102.6 101.5 93.0 107.1 100.1 102.9 90.2 107.1 126.4 133.6 134.3 126.4 133.6 168.0 86.8 95.9 133.6 2004Q3 101.5 99.7 91.8 106.8 102.2 101.3 88.3 105.3 129.4 137.9 134.9 129.5 137.9 163.1 94.0 94.5 137.9 2004Q4 97.9 100.6 95.1 114.8 108.1 99.7 86.7 103.2 136.9 148.5 152.4 132.7 148.5 167.3 101.4 103.7 148.5 2005Q1 97.9 98.5 92.7 119.4 98.0 99.7 85.8 103.3 109.7 132.0 131.8 121.2 132.0 183.0 86.7 98.3 132.0 2005Q2 97.2 96.9 88.2 118.4 97.2 98.7 84.8 102.7 119.5 132.5 137.2 124.6 132.5 183.3 89.5 96.9 132.5 2005Q3 98.1 95.6 84.8 114.9 101.1 98.9 84.1 102.5 120.4 131.4 139.5 122.0 131.4 176.3 94.3 93.6 131.4 2005Q4 94.5 92.8 79.2 115.2 104.5 96.1 81.9 99.4 136.8 128.6 143.6 118.8 128.6 172.0 103.8 95.4 128.6 2006Q1 94.8 93.4 77.1 118.6 94.6 98.0 81.5 99.6 119.3 114.2 119.7 106.8 114.2 186.5 91.8 89.1 114.2 2006Q2 95.6 96.1 78.0 120.7 101.7 100.4 81.5 100.3 135.7 125.1 130.4 118.5 125.1 194.3 94.0 90.6 125.1 2006Q3 95.5 96.4 76.8 119.5 108.2 99.0 80.9 99.7 142.6 131.9 136.4 124.7 131.9 193.0 102.7 87.1 131.9 2006Q4 93.8 95.8 75.0 123.2 114.7 97.6 78.9 96.0 150.6 132.9 144.2 128.4 132.9 191.8 113.1 91.5 132.9 2007Q1 95.4 94.5 71.2 118.9 101.3 101.2 77.8 96.3 122.1 120.0 123.7 117.6 120.0 203.1 95.2 83.2 120.0 2007Q2 96.9 95.1 69.3 118.6 106.7 101.6 76.8 96.5 137.3 129.3 138.1 126.1 129.3 206.8 100.4 83.9 129.3 2007Q3 99.0 95.4 70.2 116.6 112.8 98.8 75.9 94.6 139.0 133.6 144.0 129.8 133.6 204.7 109.2 84.4 133.6 2007Q4 94.4 95.7 70.0 115.7 113.5 96.2 72.9 89.0 141.2 138.1 153.1 127.4 138.1 205.6 120.4 84.7 138.1 2008Q1 94.7 92.7 69.2 102.7 98.9 95.4 69.1 85.0 109.7 118.7 125.9 105.2 118.7 210.6 101.1 79.8 118.7 2008Q2 91.3 89.9 64.3 89.8 97.7 90.2 64.5 79.8 116.0 122.0 129.5 103.3 122.0 206.1 95.3 75.3 122.0 2008Q3 90.9 87.1 61.9 84.4 95.9 87.8 62.7 78.6 123.0 118.4 126.3 100.6 118.4 195.2 97.6 69.4 118.4 2008Q4 87.4 81.5 69.1 67.7 93.7 79.6 62.1 75.1 109.1 105.8 99.2 83.2 105.8 175.5 97.5 70.5 105.8 2009Q1 90.4 82.4 70.7 66.6 84.1 81.2 65.1 78.1 87.3 96.0 86.8 70.0 96.0 169.0 85.7 65.2 96.0 2009Q2 87.4 79.2 66.3 69.7 83.1 79.0 61.9 75.2 91.9 96.1 95.1 72.7 96.1 169.4 82.5 64.6 96.1 2009Q3 86.7 79.8 67.8 71.9 83.6 78.2 60.0 74.5 95.0 98.9 102.9 76.1 98.9 168.6 80.5 59.9 98.9 94 2009Q4 93.1 88.2 75.1 82.0 91.3 87.1 65.6 80.6 108.6 110.1 121.0 83.5 110.1 188.5 90.2 62.9 110.1 2010Q1 93.1 90.4 72.8 85.2 94.4 89.3 66.8 80.5 114.5 103.9 122.7 79.2 103.9 211.4 93.5 71.7 103.9 2010Q2 90.4 86.9 69.9 79.8 92.4 88.5 63.7 77.1 111.5 91.5 114.7 72.7 91.5 192.2 90.4 68.3 91.5 2010Q3 92.9 89.5 75.2 79.5 95.3 91.2 62.2 77.3 114.8 93.1 117.8 76.0 93.1 187.8 93.5 62.8 93.1 2010Q4 97.2 95.3 79.2 85.0 101.4 94.4 64.4 79.4 118.5 100.0 130.7 81.0 100.0 190.3 95.9 65.0 100.0 Note: CNY: China Yuan, SGD: Singapore Dollar, JPY: Japanese Yen, KRW: Korean Won, THB: Thai Bath, MYR: Malaysian Ringgit, HKD: Hongkong Dollar, USD: United States Dollar, IDR: Indonesian Rupiah, EUR1: currency of Germany; AUD: Australian Dollar, GDP: Great Britain Pound, EUR2: currency of France; RUB: Russian Ruble, PHP: Philippine Peso, TWD: New Taiwan Dollar, EUR3: currency of Netherlands TABLE 1.5 – TRADE WEIGHTS OF CURRENCIES (PERCENT) CNY SGD JPY KRW THB MYR HKD USD IDR EUR1 AUD GBP EUR2 RUB PHP TWD EUR3 TOTAL 2000Q1 7.4 13.1 16.6 7.2 4.1 2.7 3.4 4.7 2.3 3.6 15.6 2.3 2.8 1.2 2.2 8.8 1.9 100 2000Q2 11.2 15.2 17.2 7.5 3.3 2.7 3.1 3.5 2.3 2.2 13.4 1.7 2.5 1.2 2.3 9.0 1.6 100 2000Q3 8.5 10.7 16.0 7.3 4.5 2.8 3.1 4.3 2.1 4.5 17.7 2.7 1.8 1.3 1.9 9.5 1.5 100 2000Q4 12.3 10.8 16.4 6.8 4.1 2.7 3.1 3.7 1.6 3.7 17.8 2.0 2.3 1.2 1.2 8.8 1.4 100 2001Q1 10.7 15.2 17.5 8.2 4.2 2.8 3.3 4.5 2.2 4.2 6.4 2.6 2.5 2.0 1.8 9.8 2.1 100 2001Q2 12.1 13.2 17.2 9.0 4.3 3.0 3.2 5.6 2.5 3.8 5.1 2.1 2.5 2.0 1.9 10.5 1.8 100 2001Q3 11.4 11.4 20.1 8.3 3.8 3.0 3.0 6.2 2.1 4.3 4.0 3.1 3.2 2.2 1.6 10.7 1.6 100 2001Q4 11.4 13.5 16.2 8.9 4.5 3.3 3.5 5.7 1.8 4.5 4.2 2.6 3.4 2.3 1.1 11.2 1.7 100 2002Q1 10.5 13.3 17.2 8.4 4.0 3.6 3.5 6.1 2.6 4.4 4.6 2.9 3.0 2.4 1.3 10.4 1.8 100 2002Q2 11.4 12.4 14.8 8.4 3.7 3.2 3.5 8.7 2.6 4.1 5.2 2.3 2.4 2.5 1.2 11.5 1.9 100 95 2002Q3 11.2 13.4 15.3 9.0 3.7 1.5 3.5 10.5 2.1 5.0 5.0 2.3 1.9 2.1 1.8 10.1 1.5 100 2002Q4 13.2 8.6 16.6 9.4 3.8 2.5 4.1 10.7 1.8 3.3 5.8 2.2 2.4 2.0 1.1 11.1 1.5 100 2003Q1 9.7 11.0 14.1 8.2 4.2 3.3 2.8 14.2 2.6 3.5 9.2 2.6 2.5 1.5 1.0 7.8 1.8 100 2003Q2 11.4 11.0 12.9 7.9 3.8 3.1 3.1 16.0 2.8 3.4 5.8 2.3 2.2 1.7 1.0 9.2 2.4 100 2003Q3 12.8 7.4 15.5 6.9 3.9 1.7 3.5 14.7 2.6 4.8 7.0 2.5 2.0 1.7 1.7 9.3 2.0 100 2003Q4 14.9 9.6 16.2 8.2 4.1 2.7 4.0 9.9 2.1 3.0 5.7 2.4 2.4 1.6 1.1 10.1 2.0 100 2004Q1 14.5 11.5 14.7 8.2 4.7 1.2 3.1 11.6 2.9 4.3 4.3 2.9 2.1 2.1 1.3 9.0 1.7 100 2004Q2 14.3 9.6 13.2 8.6 4.1 5.7 3.1 11.6 2.1 3.5 4.4 2.8 2.0 1.8 1.5 10.2 1.5 100 2004Q3 13.1 10.5 14.7 6.9 4.7 3.7 2.7 15.6 2.0 3.0 4.4 2.3 2.9 1.6 1.7 8.9 1.4 100 2004Q4 16.5 9.7 14.9 8.4 5.5 3.6 3.0 10.9 2.1 3.7 5.4 2.2 2.5 1.9 1.2 7.0 1.5 100 2005Q1 14.6 9.9 15.0 7.7 4.8 3.8 2.8 10.6 2.0 3.4 6.3 2.2 1.9 2.0 1.9 9.0 2.0 100 2005Q2 14.8 11.2 14.7 8.3 5.0 3.4 2.7 11.1 2.1 2.7 4.6 2.0 2.2 1.9 2.1 9.6 1.6 100 2005Q3 15.1 11.0 14.4 6.7 6.1 3.7 2.8 12.9 1.6 2.7 5.4 2.0 1.5 1.8 2.1 8.8 1.5 100 2005Q4 15.6 11.8 13.4 6.7 5.8 4.2 2.7 11.9 2.4 3.3 5.0 2.1 2.0 1.3 1.2 8.9 1.7 100 2006Q1 14.1 10.6 15.2 6.4 5.9 3.4 2.6 12.3 3.0 3.4 5.4 2.2 1.8 1.5 2.1 8.2 1.7 100 2006Q2 14.1 11.3 13.6 7.0 5.0 4.1 2.8 12.7 2.8 2.9 6.5 1.9 1.7 1.5 1.6 9.0 1.6 100 2006Q3 14.1 11.3 13.4 6.5 5.5 4.3 2.4 12.9 2.6 3.1 8.7 1.9 1.5 0.9 1.6 7.7 1.6 100 2006Q4 16.2 11.2 14.1 6.6 5.8 3.3 2.9 11.6 2.8 3.9 5.9 1.9 1.9 1.1 1.1 7.8 1.9 100 2007Q1 16.1 10.7 13.1 7.2 5.2 3.1 2.7 12.8 3.6 3.2 4.9 1.9 3.5 1.1 1.1 8.0 1.8 100 2007Q2 17.1 10.8 12.1 7.4 4.8 3.8 2.8 12.6 3.1 4.1 3.6 1.9 1.8 1.0 2.1 9.2 1.8 100 2007Q3 16.3 10.3 13.5 6.8 5.3 4.5 2.6 13.8 2.2 3.2 4.6 1.8 2.0 1.0 1.6 8.4 1.9 100 2007Q4 18.1 10.1 13.7 7.0 5.1 4.1 2.7 11.6 2.0 3.1 6.4 1.5 1.9 1.2 1.1 8.8 1.7 100 96 2008Q1 18.3 10.9 13.9 8.0 5.1 3.9 3.2 10.8 1.9 3.1 4.6 1.7 1.6 1.5 1.6 8.4 1.5 100 2008Q2 17.2 11.2 13.6 7.7 5.4 4.0 3.1 11.3 2.2 2.7 4.7 1.7 1.4 1.6 2.3 8.5 1.6 100 2008Q3 16.0 10.5 13.9 7.2 5.3 3.7 2.6 12.9 2.1 3.0 6.0 1.5 1.4 1.2 2.6 8.3 1.7 100 2008Q4 16.8 7.7 15.4 7.0 5.3 3.9 3.0 14.2 2.3 3.2 3.4 1.7 1.8 3.7 0.8 7.7 2.2 100 2009Q1 19.5 6.7 13.9 8.1 4.8 4.6 1.7 14.1 2.0 3.5 3.6 1.8 1.7 1.7 2.9 7.6 1.9 100 2009Q2 16.7 5.0 10.3 7.5 4.8 3.5 1.1 11.9 2.0 2.7 3.1 1.4 1.2 18.3 2.5 6.5 1.5 100 2009Q3 21.2 5.9 14.0 9.1 6.1 3.9 1.9 14.5 2.1 3.2 3.1 1.7 1.6 2.1 1.0 7.2 1.6 100 2009Q4 23.1 6.2 13.3 8.7 6.9 3.8 2.1 13.1 2.4 3.6 2.8 1.6 1.7 1.4 1.2 6.4 1.6 100 2010Q1 20.4 5.8 13.4 9.1 5.7 4.1 1.8 13.8 2.5 3.5 3.4 1.6 2.0 1.5 3.1 6.6 1.8 100 2010Q2 21.3 5.6 13.1 9.7 5.3 4.4 1.8 14.2 2.3 2.8 3.8 1.7 1.6 1.4 2.3 7.1 1.7 100 2010Q3 21.7 4.9 13.5 10.6 5.3 3.9 1.8 15.6 2.2 3.0 2.5 1.9 1.4 1.7 1.5 6.6 1.8 100 2010Q4 22.6 3.7 13.0 10.9 5.3 4.9 1.9 13.4 3.4 3.7 3.4 1.7 1.6 1.3 1.1 6.3 1.8 100 Note: CNY: China Yuan, SGD: Singapore Dollar, JPY: Japanese Yen, KRW: Korean Won, THB: Thai Bath, MYR: Malaysian Ringgit, HKD: Hongkong Dollar, USD: United States Dollar, IDR: Indonesian Rupiah, EUR1: currency of Germany; AUD: Australian Dollar, GDP: Great Britain Pound, EUR2: currency of France; RUB: Russian Ruble, PHP: Philippine Peso, TWD: New Taiwan Dollar, EUR3: currency of Netherlands 97 TABLE A.6 – VND’s REER (2000=100) 2000Q1 2000Q2 2000Q3 2000Q4 2001Q1 2001Q2 2001Q3 2001Q4 2002Q1 2002Q2 2002Q3 2002Q4 2003Q1 2003Q2 2003Q3 2003Q4 2004Q1 2004Q2 2004Q3 2004Q4 2005Q1 2005Q2 REER 99.93 99.89 100.7 99.27 97.27 97.68 99.92 102.3 95.67 101.0 104.3 104.2 102.5 105.6 108.4 111.4 108.2 105.7 105.1 108.6 104.9 103.2 2005Q3 2005Q4 2006Q1 2006Q2 2006Q3 2006Q4 2007Q1 2007Q2 2007Q3 2007Q4 2008Q1 2008Q2 2008Q3 2008Q4 2009Q1 2009Q2 2009Q3 2009Q4 2010Q1 2010Q2 2010Q3 2010Q4 98 REER 102.0 101.0 97.1 100.7 101.7 101.5 97.3 98.6 99.1 98.5 92.1 88.1 85.8 82.4 80.3 89.9 79.1 87.0 88.1 83.8 85.0 90.0 APPEDIX B ESTIMATION OUTPUT AND RELEVANT TEST FOR LONG-RUN IMPACT OF REAL EXCHANGE RATE ON TRADE BALANCE Table B.1 – Cointegration rank test by Johansen’s procedure for long-run impact of real exchange rate on trade balance Unrestricted Cointegration Rank Test (Trace) Hypothesized Trace 0.05 No of CE(s) Eigenvalue Statistic Critical Value Prob.** None * 0.428406 34.52429 24.27596 0.0018 At most 0.242131 11.59189 12.32090 0.0660 At most 0.005469 0.224844 4.129906 0.6929 Trace test indicates cointegrating eqn(s) at the 0.05 level * denotes rejection of the hypothesis at the 0.05 level **MacKinnon-Haug-Michelis (1999) p-values Unrestricted Cointegration Rank Test (Maximum Eigenvalue) Hypothesized Max-Eigen 0.05 No of CE(s) Eigenvalue Statistic Critical Value None * 0.428406 22.93240 17.79730 At most * 0.242131 11.36705 11.22480 At most 0.005469 0.224844 4.129906 Max-eigenvalue test indicates cointegrating eqn(s) at the 0.05 level * denotes rejection of the hypothesis at the 0.05 level **MacKinnon-Haug-Michelis (1999) p-values Prob.** 0.0077 0.0472 0.6929 Table B.2 – Cointegration equation by Johansen’s procedure for long-run impact of real exchange rate on trade balance Unrestricted Cointegrating Coefficients (normalized by b'*S11*b=I): LTB LREER LGDP -17.83347 2.572132 -3.267495 4.098424 -0.515086 0.370736 1.665768 -4.387898 4.072738 Unrestricted Adjustment Coefficients (alpha): D(LTB) 0.033082 0.012649 -0.003963 D(LREER) -0.017433 0.007537 -0.001474 D(LGDP) -0.003240 -0.011591 -0.000494 Cointegrating Equation(s): Log likelihood 230.0063 99 Normalized cointegrating coefficients (standard error in parentheses) LTB LREER LGDP 1.000000 -0.144231 0.183223 (0.04591) (0.04197) Adjustment coefficients (standard error in parentheses) D(LTB) -0.589966 (0.21610) D(LREER) 0.310891 (0.09850) D(LGDP) 0.057783 (0.07575) Cointegrating Equation(s): Log likelihood 235.6898 Normalized cointegrating coefficients (standard error in parentheses) LTB LREER LGDP 1.000000 0.000000 -0.537980 (0.17591) 0.000000 1.000000 -5.000342 (1.22291) Adjustment coefficients (standard error in parentheses) D(LTB) -0.538124 0.078576 (0.21815) (0.03127) D(LREER) 0.341780 -0.048722 (0.09826) (0.01409) D(LGDP) 0.010279 -0.002364 (0.06869) (0.00985) Table B.3 – VEC Granger Causality/Block Exogeneity Wald Tests Dependent variable: D(LTB) Excluded Chi-sq df Prob D(LREER) D(LGDP) All Dependent variable: D(LREER) Excluded D(LTB) D(LGDP) All 9.516811 3.943990 15.03778 2 0.0232 0.2676 0.0200 Chi-sq 3.598760 0.162302 3.720458 df 2 Prob 0.3082 0.9834 0.7144 100 Dependent variable: D(LGDP) Excluded D(LTB) D(LREER) All Chi-sq 3.597069 4.879888 7.35745 df 2 Table B.4 – Output of OLS estimation by ADRL’s approach step Dependent variable is D(LTB) Sample: 2000Q4 2010Q4 Included observations: 41 Coefficient Std Error t-Statistic D(LTB(-1)) -0.103799 0.170042 -1.610434 D(LREER(-1)) -0.756602 0.353554 -2.139993 D(LREER(-2)) -0.798593 0.363008 -2.199930 LTB(-1) -0.504347 0.187089 -2.695755 LREER(-1) 0.105417 0.056184 1.876286 LGDP(-1) -0.123431 0.056949 -2.167397 R-squared 0.408700 Mean dependent var Adjusted R-squared 0.324228 S.D dependent var S.E of regression 0.077707 Akaike info criterion Sum squared resid 0.211341 Schwarz criterion Log likelihood 49.81449 Hannan-Quinn criter Durbin-Watson stat 1.877972 101 Prob 0.1923 0.1808 0.1036 Prob 0.0755 0.0394 0.0345 0.0107 0.0690 0.0371 -7.18E-05 0.094528 -2.137292 -1.886526 -2.045977 APPEDIX C ESTIMATION OUTPUT OF JOHANSEN’S COINTEGRATION TEST FOR LONG-RUN IMPACT OF REAL EXCHANGE RATE ON EXPORTS AND IMPORTS Table C.1 – Coinegration equation for export Standard errors in ( ) & t-statistics in [ ] Cointegrating Eq: CointEq1 LX(-1) 1.000000 LREER(-1) -0.611787 (0.19445) [-3.14629] LGDP(-1) -2.563826 (0.07735) [-33.1473] C 6.767039 Table C.2 – Cointegration equation for imports Standard errors in ( ) & t-statistics in [ ] Cointegrating Eq: CointEq1 LI(-1) 1.000000 LREER(-1) 0.173554 (0.103985) [-1.5784] LGDP(-1) -2.494924 (0.12029) [-20.7410] C 2.580962 102 APPEDIX D OUTPUT OF ECM MODELS ESTIMATION BASED ON COINTEGRATING EQUATION OBTAINED BY JOHANSEN’S PROCEDURE AND ARDL APPROACH Table D.1 - Output of ECM models based on cointegration obtained by Johansen’s procedure Standard errors in ( ) & t-statistics in [ ] Cointegrating Eq: CointEq1 LTB(-1) 1.000000 -0.144231 LREER(-1) (0.04591) [-3.14178] 0.183223 LGDP(-1) (0.04197) [ 4.36599] Error Correction: D(LTB) D(LREER) D(LGDP) -0.589966 0.310891 0.057783 CointEq1 (0.21610) (0.09850) (0.07575) [-2.73002] [ 3.15626] [ 0.76283] -0.05095 -0.212498 -0.073413 D(LTB(-1)) (0.04994) (0.09022) (0.06938) [-1.2122] [-2.35527] [-1.05809] 0.142607 -0.206989 -0.047315 D(LTB(-2)) (0.16055) (0.07318) (0.05628) [ 0.88825] [-2.82856] [-0.84078] -0.632620 -0.464461 -0.067220 D(LREER(-1)) (0.34358) (0.15661) (0.12043) [-1.84124] [-2.96580] [-0.55815] -0.667363 -0.197518 0.084506 D(LREER(-2)) (0.35636) (0.16243) (0.12491) [-1.87272] [-1.21602] [ 0.67653] 0.061838 -0.132887 0.011631 D(LGDP(-1)) (0.35481) (0.16172) (0.12437) [ 0.17428] [-0.82169] [ 0.09352] 0.194184 -0.046510 0.490063 D(LGDP(-2)) (0.23559) (0.10738) (0.08258) [ 0.82425] [-0.43313] [ 5.93457] R-squared 0.427287 0.335671 0.469845 103 Adj R-squared 0.326220 Sum sq resids 0.204698 S.E equation 0.077592 F-statistic 4.227764 Log likelihood 50.46926 Akaike AIC -2.120452 Schwarz SC -1.827891 Mean dependent -7.18E-05 S.D dependent 0.094528 Determinant resid covariance (dof adj.) Determinant resid covariance Log likelihood Akaike information criterion Schwarz criterion 0.218437 0.042527 0.035366 2.863249 82.68301 -3.691854 -3.399293 -0.002609 0.040005 4.72E-09 2.69E-09 230.0063 -10.04909 -9.046021 Table D.2 - Output of OLS estimation for ECM models cointegration obtained by Johansen’s procedure Dependent variable is D(LTB) Sample: 2000Q4 2010Q4 Included observations: 41 Regressor Coefficient Std Error t-Statistic EC(-1) -0.451492 0.158637 -2.846070 D(LTB(-1)) -0.135307 0.106575 -1.516419 D(LREER(-1)) -0.798601 0.322263 -2.478104 D(LREER(-2)) -0.839200 0.334909 -2.505757 R-squared 0.451493 Mean dependent var Adjusted R-squared 0.352965 S.D dependent var S.E of regression 0.076036 Akaike info criterion Sum squared resid 0.213917 Schwarz criterion Log likelihood 49.56615 Hannan-Quinn criter Durbin-Watson stat 1.879083 0.376288 0.025150 0.027197 5.022026 93.45130 -4.217136 -3.924575 0.018870 0.034438 based on Prob 0.0072 0.0731 0.0179 0.0167 -7.18E-05 0.094528 -2.222739 -2.055561 -2.161862 Table D.3 - Breusch-Godfrey Serial Correlation LM Test of output in table D.2 F-statistic 0.429052 Prob F(4,33) 0.7866 Obs*R-squared 1.659929 Prob Chi-Square(4) 0.7980 Dependent Variable: RESID Sample: 2000Q4 2010Q4 104 Included observations: 41 Presample missing value lagged residuals set to zero Regressor Coefficient Std Error t-Statistic EC(-1) -0.158239 0.267427 -0.591709 D(LTB(-1)) -0.020502 0.435879 -0.047036 D(LREER(-1)) 0.065514 0.381706 0.171636 D(LREER(-2)) -0.073241 0.427717 -0.171238 RESID(-1) 0.198029 0.512290 0.386557 RESID(-2) 0.164988 0.330999 0.498455 RESID(-3) -0.067740 0.195488 -0.346515 RESID(-4) -0.148001 0.207409 -0.713570 R-squared 0.040486 Mean dependent var Adjusted R-squared -0.163047 S.D dependent var S.E of regression 0.078498 Akaike info criterion Sum squared resid 0.203342 Schwarz criterion Log likelihood 50.60548 Hannan-Quinn criter Durbin-Watson stat 1.968945 Table D.4 – Ramsay RESET test of output in table D.2 F-statistic 0.084610 Prob F(1,36) Log likelihood ratio 0.096249 Prob Chi-Square(1) Dependent Variable: D(LTB) Sample: 2000Q4 2010Q4 Included observations: 41 Coefficient Std Error t-Statistic EC(-1) -0.452734 0.160693 -2.817378 D(LTB(-1)) -0.136348 0.158589 -0.859759 D(LREER(-1)) -0.802151 0.326553 -2.456419 D(LREER(-2)) -0.855907 0.343960 -2.488394 FITTED^2 0.532812 1.831733 0.290878 R-squared 0.402896 Mean dependent var Adjusted R-squared 0.336551 S.D dependent var S.E of regression 0.076995 Akaike info criterion Sum squared resid 0.213416 Schwarz criterion Log likelihood 49.61427 Hannan-Quinn criter Durbin-Watson stat 1.881438 105 Prob 0.5581 0.9628 0.8648 0.8651 0.7016 0.6215 0.7312 0.4805 0.006976 0.072788 -2.078316 -1.743961 -1.956562 0.7728 0.7564 Prob 0.0078 0.3956 0.0190 0.0176 0.7728 -7.18E-05 0.094528 -2.176306 -1.967334 -2.100210 APPDEDIX E NARAYAN’S NEW SET OF CRITICAL VALUES FOR THE BOUNDS F-TEST Source: Paresh Kumar Narayan (2004) TABLE E.1 – Critical values for the bound test: Case II: restricted intercept and no trend – percent level TABLE E.2 – Critical values for the bound test: Case II: restricted intercept and no trend - percent level 106 TABLE E.3 – Critical values for the bound test: Case II: restricted intercept and no trend - 10 percent level TABLE E.4 – Critical values for the bound test: Case III: restricted intercept and trend - percent level 107 TABLE E.5 – Critical values for the bound test: Case III: restricted intercept and trend - percent level TABLE E.6 – Critical values for the bound test: Case III: restricted intercept and trend - 10 percent level 108 ... explore the long- run impact of exchange rate on trade balance  Secondly, error-correction models (ECM) based on the long- run estimating of the cointegration trade balance equations in the long run. ..MINISTRY OF EDUCATION AND TRAINING UNIVERSITY OF ECONOMICS HOCHIMINH CITY PHAM THI TUYET TRINH THE IMPACT OF EXCHANGE RATE FLUCTUATION ON TRADE BALANCE IN SHORT AND LONG RUN Major: Finance and. .. to the long- run and short- run relationships between exchange rate and trade balance are not consistent among studies, they indicate the positive impact of exchange rate on trade balance in long- run