Spill-Over Effect of Fiscal Policy between Vietnam and Its Trading Partners Nguyen Hoang Thuy Bich Tram Nguyen Thi Lien Hoa University of Economics Ho Chi Minh city, Vietnam Abstract The paper researches about the fiscal policy transmission between Vietnam and its trading partner countries in the period 1995-2016 The paper applies the global vector auto-regression model (GVAR) on the Vietnam's major trading partners such as China, South Korea, Taiwan, Australia, Singapore, the United States, Japan, Thailand, Indonesia, Malaysia, and Philippines to clarify the interdependence between these economics and Vietnam The research has found that the increase in government spending in the US will reduce household consumption and output in Vietnam So, it has confirmed the existence of beggar-thy-neighbour effect, when considering the United States and Vietnam However, there is the impact of increasing the economic benefits in Vietnam, when considering Singapore and Vietnam It is called prosper-thy-neighbour effect Other countries have not enough evidences to conclude Keywords: beggar-thy-neighbour, fiscal policy transmission Introduction When economies open and integrate with the rest of the world through international trade and capital flows shift, then the shock stemmed from a country that is passed on to other countries through various channels The cross-border impact of domestic fiscal activities is a widespread concept among policy makers, scholars and international organizations such as the International Monetary Fund As we know, to deal with the global crisis, the expansionary fiscal policy has been used as a powerful tool for stability in the countries all over the world Therein, the policy maker has enhanced government spending, delaying debt aimed at stimulating demand in the world which has been gradually declining Then, raising a concern that the fiscal expansion measures in a country that have the ability to spill over other countries It can bring positive impacts or worsen the policy objectives which the countries are pursuing This implies that, some countries would benefit from the political decisions and the difficulty of other countries Moreover, whether that belief of those policymakers is in line with the predictions of the theory and empirical evidence? However, currently, the evidence of the international spill-over of fiscal policy in country-level is very few, especially in Vietnam Furthermore, quantitative studies based on the typical model for the prediction of crossborder effect is also rather less This paper will contribute an empirical evidence regarding estimating the spillover effect of fiscal shock on trading partner countries to Vietnam Today, in the context of the extensive integration of the global economy, Vietnam has joined the world's economic institutions and signed several agreements related to trade liberalization This has put Vietnam in the playground of the world, influenced more from its trading partner countries To meet the integration process, Vietnam policies are constantly changing in the direction of adapting and responding before the effects of other countries 491 Hence, the need of assessing the influence of fiscal policy in the countries having trade relation with Vietnam's economy is essential, help policy makers give the right decisions to achieve the stable development purpose of the economy This research considers the fiscal policy transmission channels from countries having trade relations with Vietnam to clarify the policy dependence between them So, it not only contribute to the theoretical research related to fiscal policy, but also help leaders, organization investors, policy makers add the new perspective on regulatory tools for emerging economies in practices The paper researches the fiscal policy transmission between Vietnam and its trading partner countries in the period 1995-2016 Vietnam's major trading partners, including China, South Korea, Taiwan, Australia, Singapore, the United States, Japan, Thailand, Indonesia, Malaysia, the Philippines will clarify the interdependence between these economies These trading partners are expected to be representative of the entire trade relations in Vietnam because total import-export turnover with these countries account for more than 70% of the total import-export turnover of Vietnam The paper will focus on answering the following questions whether there are spill-over effects of fiscal policy between Vietnam and its trading partners and which transmission channels they are expressed through The paper is divided into four sections The first section will present literature review The second section is methodology Section will show the research results and discussion The final section will give the conclusion and implication Literature review Corsetti and Pesenti (2001) has developed the earlier researches such as Corsetti, Meier, Muller (2010), Reinhart (1988), Frenkel Razin (1987), Mundell – Fleming (1968, 1962) This study shows that a long-term fiscal shock from the host country will contribute to the world government expenditure, which creates the increased of demand and output in the host country This impact cause of the price of the host country increased Therefore, an increase in term of trade in the host country implies that the domestic market are buying less foreign goods Because real wages adjusted decrease in the host country, so, rising output in the long term is lower than the initial increase of government spending in the host country Moreover, household consumption in the world is all reduced because of the increase in price in both domestic and foreign This happens because the host country mostly spend on domestic goods rather than foreign goods Therefore, if the foreign currency is depreciated, it will reduced the purchasing power of foreign goods, then reduce real wages and the real money supply and worsen the world consumption So the fiscal policy in the host country will bring up negative impact on other countries It is called beggar-thy-neighbour effect The transmission channels are relative prices and the term of trade expressed by the real effective exchange rate However, the negative impact on foreign consumption and production can be smaller if the tradable goods between these countries are complementary It can impact on foreign prices in other directions Corsetti and Müller (2011) has said that, during the global financial crisis 2007-2009, fiscal policy has been widely used as a tool of economic stability Policy makers have to use expansionary fiscal policy that increases public debt At the same time, the call for regulating the policies have emphasized that the international spillover effects of fiscal policy can be very large Therefore, the author gave a new proof of the cross-border impact of discretionary fiscal policy based on the VAR model facilities and quantitative economic cycle models Their research focuses on America with its trading partners European area and England They show that when the ratio of government expenditure on GDP grows up to 1% in the United States, it will the increase output up to 0.5% in Europe and 1% in the UK This effect lasts for years and the dollar is depreciated against the currency of trade partners They find the existence of pervasive spill-over effect The impact of financial factors is stronger than the commercial elements in the international transmission mechanism of fiscal policy This result is pointed out by two-country business cycle model 492 Nicar (2015) has estimated the impact of US government spending and taxation in Canada and England The shock of spending and taxes is determined by using sign restriction vector auto-regression model The author has found that the impact of fiscal expansion are not the same between the countries It increases the GDP in all three countries in the short term In addition, the shock of government expenditure still has greater impact than the shock of tax These results support the view of that a number of countries could benefit from the fiscal expansion of America Nickel and Vansteenkiste (2011) studied the transmission of fiscal shocks on the financial variables The author has used the quarterly data in countries: France, Germany, Italy, Spain, Sweden, the UK, Japan and the United States of America from 1980Q1-2008Q4 The research results showed that the issued government bonds by the US and Germany benefit from the loosened fiscal policies in other countries Because these countries are considered a safe haven Dias et al (2012) has applied SVAR method to evaluate international interdependence for the two cases: the first case study between Argentina and the European Community (EU) and the second case study between Brazil and the EU This analysis has emphasized the impact of the shock of long-term fiscal policy of increasing the world government expenditure on consumption and domestic production in Brazil and Argentina Concur with Corsetti and Pesenti (2001), the case of Argentina and the European Community confirmed the negative effect of world fiscal policy on output and consumption in Argentina For the Brazilian economy, the results not confirm the beggar-thy-neighbour effect of the shock of the EU fiscal policy on Brazil's production and consumption The results are the same with Dias and McDermott (2004), when considering Brazil and the US We haven’t yet found an in depth research about the fiscal policy transmission in the context of international integration The current studies mainly focus on associating fiscal policy with monetary policy primarily to create a favourable environment for business, or to help Vietnam regain growth momentum, control economic decline, curb inflation, and reduce the balance of payments deficit in Vietnam Meanwhile, the spill-over effect from foreign fiscal policy, especially from trading partner countries, are still open Therefore, the paper researches on fiscal policy transmission from Vietnam’s trading partner countries, which are expected to contribute to the theory about the interdependence between countries, make the international fiscal policy transmission channels be clearer and bring important macro policy implications Methodology and data The paper applied the Global Vector Autoregressive Model (GVAR) of Dees, di Mauro, Pesaran and Smith (2007) to assess the spill-over effects from Vietnam’s trading partner countries GVAR models have incorporated the error correction model of individual countries into the global framework and allows for the interdependence between countries The model of each country is linked to the rest of the world through the presence of foreign characteristic variables, therefore, a shock in one country can spread to the rest of the world Suppose there are N + countries in the global economy, is denoted by i = 0, 1, 2,…., N, in which country has the relationship with the rest of the global Each country i is set up VARX* model as follows, assuming that all variables are lagged 1: ∗ 𝑥𝑖𝑡 = 𝛿𝑖0 + 𝛿𝑖1 𝑡 + Φ𝑖 𝑥𝑖𝑡−1 + Λ𝑖0 𝑥𝑖𝑡∗ + Λ𝑖1 𝑥𝑖𝑡−1 + Γ𝑖0 𝑑𝑡 + Γ𝑖1 𝑑𝑡−1 + 𝜀𝑖𝑡 Where: xit are the domestic characteristic variables of country i xit* are the foreign characteristic variables of country i dt is the global variables, assumed to be exogenous for the global economy as the oil price variable The foreign variables are constructed through the proportion of bilateral trade between countries to understand the relative importance of each trading partner countries The GVAR model in this study includes Vietnam and eleven trading partner countries with Vietnam, accounting for nearly seventy percent of 493 Vietnam's total trade value in 2015 So, this model has the twelve VAR models for each country on the condition that the foreign variables of each country and the global factor are weakly exogenous form, denoted VARX* The foreign variables are calculated by taking the weighted average of the equivalent variables for each country That is: 𝑁 𝑥𝑖𝑡∗ = ∑ 𝜔𝑖𝑗 𝑥𝑗𝑡 𝐽=0 In particular, ωij is the trading proportion with country j in the total export and import value of country i; 𝜔𝑖𝑖 = 0, ∀𝑖 = 0, 1, 2, … , 𝑁 ∑𝑁 𝑗=0 𝜔𝑖𝑗 = 1, ∀𝑖, 𝑗 = 0, 1, 2, … , 𝑁 VARX* model can be written as error correction form VECMX* as follows: ∗ ∆𝑥𝑖𝑡 = 𝑐𝑖0 + 𝜑𝑖 𝐸𝐶𝑀𝑖,𝑡−1 + Λ𝑖0 Δ𝑥𝑖𝑡∗ + Λ𝑖1 Δ𝑥𝑖𝑡−1 + 𝜇𝑖𝑡 𝐸𝐶𝑀𝑖,𝑡−1 is the error correction coefficients, represents the co-integration relationship between xit, xit and xit*, xit and xjt when i ≠ j, in the model of country i Therefore, GVAR model allows the interaction between the different economies through three separate ∗ channels: the contemporaneous dependence of 𝑥𝑖𝑡 on 𝑥𝑖𝑡∗ and 𝑥𝑖𝑡−𝑚 ; the dependence of domestic variables on the exogenous global variables 𝑑𝑡 ; the simultaneous dependence of the shock of country i on country j, measured by the cross-covariance ∑𝑖𝑗 The contribution of Corsetti and Pesenti (2001) improved those previous studies, especially, considering the impact of fiscal policy on trading partner countries in the open new macroeconomic model In particular, the economic distortion is expressed through the national power impact on the term of trade by manipulating the supply of products, which is combined in the model Therefore, Corsetti and Pesenti (2001) provided a new theory framework of the fiscal transmission between trading partner countries The application of this theoretical model will provide the best understanding relating to Vietnam's fiscal policy and recognize total negative impacts from the trading partner countries of Vietnam According to Corsetti and Pesenti (2001), long-term household spending is dependent on government spending Therefore, Vietnamese consumption is affected by the fiscal policy in its trading partner countries which is shown in model as below, assuming lag for all variables: ∗ 𝑔𝑜𝑖𝑡 𝑔𝑜𝑖𝑡−1 𝑔𝑜 ∗ 𝑔𝑜𝑖𝑡−1 [ ℎ𝑜 ] = 𝛿𝑖0 + 𝛿𝑖1 𝑡 + Φ𝑖 [ ℎ𝑜 ] + Λ𝑖0 [ 𝑖𝑡 ] + Γ𝑖0 𝑝𝑜𝑖𝑙𝑡 + Γ𝑖1 𝑝𝑜𝑖𝑙𝑡−1 + 𝜀𝑖𝑡 ∗ ] + Λ 𝑖1 [ ∗ ℎ𝑜𝑖𝑡 ℎ𝑜𝑖𝑡−1 𝑖𝑡 𝑖𝑡−1 The impact of world fiscal policy on Vietnamese output is shown in model as follows, assuming lag for all variables: 𝑔𝑜𝑖𝑡 𝑔𝑜𝑖𝑡−1 𝑔𝑜 ∗ 𝑔𝑜 ∗ [𝑦𝑦 ] = 𝛿𝑖0 + 𝛿𝑖1 𝑡 + Φ𝑖 [𝑦𝑦 ] + Λ𝑖0 [ 𝑖𝑡∗ ] + Λ𝑖1 [ 𝑖𝑡−1 ] + Γ𝑖0 𝑝𝑜𝑖𝑙𝑡 + Γ𝑖1 𝑝𝑜𝑖𝑙𝑡−1 + 𝜀𝑖𝑡 ∗ 𝑦𝑦𝑖𝑡 𝑦𝑦𝑖𝑡−1 𝑖𝑡 𝑖𝑡−1 The research also clarifies the interdependence between the local currency purchasing power and the fiscal policy in Vietnam’s trading partner countries Therefore, the impact of world fiscal policy on the real money balance of Vietnam is expressed in model 3, assuming lag for all variables: 𝑔𝑜𝑖𝑡 𝑔𝑜𝑖𝑡−1 𝑔𝑜 ∗ 𝑔𝑜 ∗ [𝑚𝑚 ] = 𝛿𝑖0 + 𝛿𝑖1 𝑡 + Φ𝑖 [𝑚𝑚 ] + Λ𝑖0 [ 𝑖𝑡∗ ] + Λ𝑖1 [ 𝑖𝑡−1 ] + Γ𝑖0 𝑝𝑜𝑖𝑙𝑡 + Γ𝑖1 𝑝𝑜𝑖𝑙𝑡−1 + 𝜀𝑖𝑡 ∗ 𝑚𝑚𝑖𝑡 𝑚𝑚𝑖𝑡−1 𝑖𝑡 𝑖𝑡−1 Term of trade is expressed through multilateral real exchange rates to consider the relative price between trading partners Based on the model of Corsetti and Pesenti (2001), the impact of world fiscal policy on Vietnam’s real exchange rate is expressed in model 4, assuming lag for all variable: 𝑔𝑜𝑖𝑡 𝑔𝑜𝑖𝑡−1 𝑔𝑜 ∗ 𝑔𝑜 ∗ [ 𝑡𝑡 ] = 𝛿𝑖0 + 𝛿𝑖1 𝑡 + Φ𝑖 [ 𝑡𝑡 ] + Λ𝑖0 [ ∗𝑖𝑡 ] + Λ𝑖1 [ ∗𝑖𝑡−1 ] + Γ𝑖0 𝑝𝑜𝑖𝑙𝑡 + Γ𝑖1 𝑝𝑜𝑖𝑙𝑡−1 + 𝜀𝑖𝑡 𝑡𝑡𝑖𝑡 𝑡𝑡𝑖𝑡−1 𝑖𝑡 𝑖𝑡−1 The impact of world fiscal policy on domestic prices is showed in model 5, assuming lag for all variables: ∗ 𝑔𝑜𝑖𝑡∗ 𝑔𝑜𝑖𝑡−1 𝑔𝑜𝑖𝑡 𝑔𝑜𝑖𝑡−1 ∗ ∗ [𝑚𝑜𝑖𝑡 ] = 𝛿𝑖0 + 𝛿𝑖1 𝑡 + Φ𝑖 [𝑚𝑜𝑖𝑡−1 ] + Λ𝑖0 [𝑚𝑜𝑖𝑡 ] + Λ𝑖1 [𝑚𝑜𝑖𝑡−1 ] + Γ𝑖0 𝑝𝑜𝑖𝑙𝑡 + Γ𝑖1 𝑝𝑜𝑖𝑙𝑡−1 + 𝜀𝑖𝑡 ∗ ∗ 𝑝𝑟𝑖𝑡 𝑝𝑟𝑖𝑡−1 𝑝𝑟𝑖𝑡 𝑝𝑟𝑖𝑡−1 Where: 494 go is the domestic government expenditure growth rate, ho is domestic household consumption growth rate, yy is the output growth rate, mm is real money balance growth rate, tt is term of trade, mo is money supply growth rate, pr is domestic price growth rate Data The research collects a dataset from 1995Q2 to 2016Q4 for 12 countries, including Australia, China, Indonesia, Japan, South Korea, Malaysia, Philippines, Singapore, Taiwan, Thailand, The United States of America and Vietnam Most variables are sourced from the IMF, except that the world oil price variable is collected from the Datastream and variable data rates of multilateral real exchange rate variable is collected from European economic organization Bruegel All variables were removed seasonality Particularly, Vietnam and China only have annual datasets Government expenditure (go), household expenditure (ho) and the total domestic output (gdp) data are only reported by year Therefore, the paper applies univariate decomposition techniques combined multivariable adjustment method which European General Statistics Office often uses to estimate the quarterly components of GDP and GDP by expenditure approach The matrix of trade (wij) for the foreign variables is calculated by taking the sum of exports and imports between countries i and j divided by the total export of the country i with all of your trading partners The paper uses fixed matrix from the average figures of years 2014-2016, collected from the IMF's trade statistics The result table is shown as below: Table 1: The matrix of trade Austrailia China Indonesia Japan Korea Malaysia Philippines Singapore Taiwan Thailand USA Vietnam 0.06 0.04 0.06 0.05 0.05 0.01 0.04 0.03 0.05 0.03 0.02 China 0.39 0.22 0.33 0.38 0.18 0.20 0.20 0.34 0.24 0.48 0.29 Indonesia 0.03 0.03 0.04 0.03 0.06 0.04 0.11 0.02 0.06 0.02 0.02 Japan 0.17 0.16 0.16 0.13 0.13 0.20 0.08 0.16 0.20 0.16 0.13 Korea 0.08 0.15 0.08 0.09 0.06 0.08 0.08 0.07 0.04 0.09 0.16 Malaysia 0.04 0.05 0.07 0.04 0.03 0.05 0.17 0.04 0.08 0.04 0.04 Philippines 0.01 0.02 0.02 0.02 0.02 0.02 0.03 0.03 0.03 0.02 0.01 Singapore 0.05 0.04 0.16 0.03 0.04 0.19 0.09 0.07 0.06 0.04 0.04 Taiwan 0.03 0.10 0.03 0.07 0.05 0.06 0.08 0.09 0.04 0.05 0.06 Thailand 0.05 0.04 0.07 0.06 0.02 0.09 0.07 0.05 0.03 0.03 0.05 USA 0.12 0.29 0.11 0.23 0.19 0.13 0.16 0.13 0.17 0.14 0.18 Vietnam 0.02 0.05 0.03 0.03 0.06 0.04 0.02 0.04 0.03 0.05 0.04 Australia Results and discussion 4.1 Unit root test ADF test results indicate that the hypothesis H0 cannot be rejected It means that all variables are integrated level WS test results also shows all the variables have unit root According to Leybourne et al (2005), unit root test WS is more powerful than traditional ADF test The unit test results show that all variables in the model are I(0)/I(1), in accordance with the assumptions of the model 495 Table 2: The results of unit root test at significance level 5% Austrailia go I(0) go* I(1) ho I(0) ho* I(0) yy I(0) yy* I(0) mm I(0) mm* I(0) tt I(0) tt* I(0) mo I(0) mo* I(0) pr I(0) pr* I(0) China Indonesia Japan Korea Malaysia Philippines Singapore Taiwan Thailand USA Vietnam I(0) I(0) I(0) I(0) I(0) I(0) I(0) I(0) I(0) I(0) I(1) I(0) I(0) I(0) I(0) I(0) I(0) I(0) I(0) I(0) I(1) I(0) I(0) I(0) I(0) I(0) I(0) I(0) I(0) I(0) I(0) I(0) I(1) I(0) I(0) I(0) I(0) I(0) I(0) I(0) I(0) I(0) I(1) I(0) I(1) I(0) I(0) I(0) I(0) I(0) I(0) I(0) I(0) I(0) I(1) I(0) I(0) I(0) I(0) I(0) I(0) I(0) I(0) I(0) I(0) I(0) I(0) I(0) I(1) I(0) I(0) I(0) I(0) I(0) I(0) I(0) I(0) I(0) I(0) I(0) I(0) I(0) I(0) I(0) I(0) I(0) I(0) I(0) I(0) I(0) I(0) I(0) I(0) I(0) I(0) I(0) I(0) I(0) I(0) I(0) I(0) I(0) I(0) I(0) I(0) I(0) I(0) I(0) I(0) I(0) I(0) I(0) I(1) I(0) I(0) I(0) I(0) I(0) I(0) I(0) I(0) I(0) I(0) I(0) I(0) I(0) I(0) I(0) I(0) I(0) I(0) I(0) I(0) I(0) I(0) I(0) I(0) I(0) I(0) I(0) I(0) I(0) I(0) I(0) I(0) I(0) I(0) I(0) I(0) I(0) I(0) I(0) I(0) I(0) poil I(0) 4.2 The fiscal transmission from trading partners to Vietnam Next, the paper will use the GIRFs to analyse the dynamic effects of the simulated shocks on Vietnam: (1) the shock of one standard deviation increase in trading partners’ government expenditure to Vietnamese households consumption, (2) the shock of one standard deviation increase in trading partners’ government expenditure to Vietnamese output, (3) the shock of one standard deviation increase in trading partners’ government expenditure to Vietnamese real money balance, (4) the shock of one standard deviation increase in trading partners’ government expenditure to Vietnamese term of trade, (5) the shock of one standard deviation increase in trading partners’ government expenditure to domestic prices The simulation will determine the level of international spill-overs 2.1 The effect of the world fiscal policies on Vietnamese household consumption The graph of general impulse response functions (GIRFs) shows the response of each variable in the period of 40 quarters to express the convergence of the shock The graphs include confidence intervals 95% significance level, are calculated based on the bootstrap technique, but we just focus the results of first quarters, because it is the proper time for thinking about macro fluctuations Table 3: The GIRFs of household consumption in Vietnam from its trading partners Countries Australia China Indonesia Japan Korea Malaysia Philippines Singapore Taiwan Thailand USA Fiscal policy shock from trading partners (+1σ) 1.14% 0.28% 5.11% 0.49% 1% 4.35% 3.01% 5.7% 1.69% 2.75% 2.18% Vietnamese household consumption growth rate after year years -0.016% -0.023% 0.082% 0.049% -0.006% -0.02% 0.016% 0.018% -0.00033% 0.004% 0.028% 0.019% -0.032% -0.005% -0.025% -0.009% -0.023% -0.01% 0.008% 0.0003% -0.034% -0.015% 496 Table shows that a shock which government expenditure increases one standard deviation in Australia, Indonesia, Philippines, Singapore, Taiwan and U.S, cause to reduce Vietnamese household consumption after years They create beggar-thy-neighbour in Vietnam Based on Corsetti and Pesenti (2001) about the economic interdependence, we can explain this phenomenon as follows: growing government spending in these countries, causes to increase aggregate demand in the world, lead to increase foreign price and wage, so, the price of imported goods increased for Vietnamese people, raising the domestic price After that, term of trade is reduced in Vietnam that decreases the purchasing power in domestic country The relative price level increase makes domestic households consume less and export more However, the permanent shock could cause a Vietnamese household consumption decrease Considering fiscal policy shock in Australia, Indonesia, the Philippines, Singapore, Taiwan, USA, it confirms the effect of "beggar-thy-neighbour", would reduce Vietnamese household consumption But, there are also cases, increase household spending, causing the effect Vietnam "prosper-thyneighbour" when considering countries China, Japan, Korea, Malaysia, and Thailand 4.3 The effect of the world fiscal policies on Vietnamese output Table 4: The GIRFs of output in Vietnam from its trading partners Countries Australia China Indonesia Japan Korea Malaysia Philippines Singapore Taiwan Thailand USA Fiscal policy shock from trading partners (+1σ) 1.14% 0.28% 4.6% 0.51% 0.97% 4.56% 3.85% 5.51% 1.84% 2.79% 2.21% Vietnamese output growth rate after year years 0.00019% -0.00072% 0.09% 0.033% 0.003% 0.008% -0.011% -0.028% -0.014% -0.01% -0.0048% -0.0049% 0.017% 0.057% -0.002% 0.003% -0.018% -0.014% 0.008% -0.008% -0.01% -0.007% Table shows that the shock of increasing government expenditure in Australia, USA and Taiwan will make the growth rate of Vietnamese economy fall in the long term So, the effect "beggar-thy-neighbour" of the world fiscal policy have been confirmed with regard to Vietnamese output growth rate As indicated in the theory model of Corsetti and Pesenti, the shock of fiscal expansion would make the foreign price higher which increases the foreign demand for Vietnamese tradable goods These effects may increase the foreign demand for Vietnamese tradable goods, but decrease domestic household consumption The proportion of household consumption is higher than the ratio of tradable goods, which makes domestic output decrease in the long term In case of Japan, Korea, Malaysia, Thailand, they make household consumption increase, but cause output to decrease in Vietnam Maybe, the reason is that Vietnam mainly consume imported goods from them In contrast, the effect "prosper-thy-neighbour" is confirmed when considering between Vietnam and China In case of Indonesia, Philippines, Singapore, despite of reducing domestic household consumption, Vietnamese production still increases, because the goods between Vietnam and these countries is complementary which increases foreign demand for Vietnamese goods Therefore, they have "prosper-thyneighbour" effects 497 4.4 The effect of the world fiscal policies on Vietnamese real money balance Table 5: The GIRFs of real money balance in Vietnam from its trading partners Countries Australia China Indonesia Japan Korea Malaysia Philippines Singapore Taiwan Thailand USA Fiscal policy shock from trading partners (+1σ) 1.17% 0.28% 5.23% 0.46% 1.28% 4.43% 3.02% 5.94% 1.78% 2.66% 2.18% Vietnamese real money balance growth rate after: year years 0.017% 0.011% -0.36% -0.398% 0.025% -0.008% -0.012% -0.018% 0.12% 0.104% -0.017% -0.011% 0.025% 0.021% -0.003% -0.001% 0.03% 0.01% -0.017% -0.013% 0.025% -0.0014% In table 5, we see a shock occurs when the speed of government expenditure increased one standard deviation in China, Indonesia, Japan, Malaysia, Singapore, Thailand and USA, it will reduce real money balance growth rate in Vietnam after years However, we obtain reverse results in the case of Australia, Korea, Philippines and Taiwan In case of the USA, it brings negative impact on Vietnamese real money balances in the long-term, though relatively small, but cannot be ignored It can be categorized as the "beggar-thy-neighbour" effect According to Corsetti and Pesenti (2001), international fiscal policy transmits to the term of trade in domestic country The US Government's spending increase will push up the US aggregate demand, then cause a higher price in USA This will decline Vietnamese real exchange rates, may increase the exported goods of Vietnam Initially, the price of tradable goods is increased, then turns to Vietnam's price index Higher domestic prices will make the purchasing power of the local currency fall and reduce domestic real incomes This effect is consistent with the theory However, the rest of the countries are not enough evidence to judge 4.5 The effect of the world fiscal policies on the term of trade in Vietnam Term of trade is expressed through real effective exchange rate (REER), which consider the relative price to the trading partners Table 6: The GIRFs of the term of trade in Vietnam from its trading partners Countries Australia China Indonesia Japan Korea Malaysia Philippines Singapore Taiwan Thailand USA Fiscal policy shock from trading partners (+1σ) 1.16% 0.27% 4.94% 0.48% 0.97% 3.87% 3.05% 5.58% 2.27% 3.15% 2.17% 498 The term of trade growth rate in Vietnam after year years -0.012% -0.002% 0.18% 0.21% -0.008% 0.003% 0.012% 0.005% 0.003% -0.007% 0.002% -0.002% -0.017% -0.026% 0.021% -0.001% 0.038% 0.015% 0.068% 0.033% 0.011% -0.002% In table 6, a shock occurs when the speed of government expenditure increased one standard deviation in Australia, Korea, Malaysia, Philippines, Singapore and USA, it will reduce the term of trade growth rate in Vietnam after years However, we obtain reverse results in the case of China, Indonesia, Japan, Taiwan and Thailand In case of Singapore and USA, we can explain that foreign expansionary fiscal policy brings higher competitiveness of Vietnamese tradable goods than the US and Singapore which causes to reduce the term of trade in Vietnam However, the long term influence can have a negative impact on total domestic demand by pushing domestic prices up and reduce the purchasing power of the local currency and real wages It will bring the effect of "beggar-thy-neighbour" Therefore, the results fit theory with the long-term negative effects of expanding fiscal policy through the reduction of the term of trade, domestic consumption, output, and real money balances in Vietnam The remaining countries are not enough evidence to confirm 4.6 The effect of the world fiscal policies on domestic price in Vietnam As Corsetti and Pesenti (2001), the domestic price is affected by world fiscal policy position, domestic monetary policy and government expenditure in the long term However, this empirical analysis is a challenge From 1995 to 2016, Vietnamese price has suffered significant changes due to inflation in the economy This estimate is intended to clarify the effect of the price in the fiscal transmission Table 7: The GIRFs of domestic price in Vietnam from its trading partners Countries Australia China Indonesia Japan Korea Malaysia Philippines Singapore Taiwan Thailand USA Fiscal policy shock from trading partners (+1σ) 1.15% 0.28% 4.54% 0.48% 0.89% 4.13% 2.74% 5.47% 1.58% 2.47% 2.1% Domestic price growth rate in Vietnam after year years -0.011% -0.019% 0.28% 0.33% 0.04% 0.03% 0.024% 0.018% -0.028% -0.031% 0.025% 0.028% -0.04% -0.038% 0.01% 0.001% -0.017% -0.02% 0.013% 0.02% 0.023% 0.018% In table 7, a shock occurs when the speed of government expenditure increased one standard deviation in Australia, Korea, Malaysia, Philippines, and Taiwan, it will reduce the domestic price growth rate in Vietnam after years However, we obtain reverse results in the case of China, Indonesia, Japan, Malaysia, Singapore, Thailand and USA When the government expenditure increases in the USA and Singapore, the Vietnam prices increase According to Corsetti and Pesenti (2001), this behavior of prices, related to the American government's spending, shows that trade between Vietnam and the United States are mostly substitute goods However, trade between Vietnam and Singapore mainly complementary goods, which increases the production of Vietnam The remaining countries are not enough evidence to conclude Conclusions According to the experimental results, the permanent shock of expansionary fiscal policy in the United States will alter the term of trade in Vietnam Initially, the devaluation of the real exchange rate benefits for export and make imports more expensive Therefore, foreign currency cash flow will improve the balance of 499 trade in Vietnam However, in the long run, the real money balance decreases, due to domestic commodity price increases, reducing the purchasing power of households Household consumption accounts for a larger proportion than exports, and trade between Vietnam and the USA is mainly substitute goods, which makes Vietnam's output reduce over the long term In brief, the permanent shock of expansionary fiscal policy in the US makes household expenditure and output decrease, and domestic price rise, which should be sufficient evidence for the negative effect of "beggar-thy-neighbour", as indicated by Corsetti and Pesenti (2001) This result is similar to the Dias et al (2013), research in Brazil and US, and Arin and Koray (2006), done in Canada and US Also, according to the experimental results, the permanent shock of expansionary of government expenditure in Singapore could make the price of Singapore goods rise higher than Vietnamese goods, which brings the advantage for export in Vietnam However, in the long term, it will make domestic goods prices also climb up, the purchasing power of money rise and household consumption reduce in Vietnam The tradable goods between the two countries are complementary, which is the reason for the greater export volume than the amount of falling household consumption It makes Vietnam’s production increase Also, according to Corsetti and Pesenti (2001), complementary tradable goods will bring benefit for Vietnamese utility (increased output), that is the effect "prosper-thy-neighbour" (get rich for Vietnam) Reference Arin, P., Koray, F 2006, “International transmission of fiscal shocks an empirical investigation”, Working Paper Corsetti, G., Pesenti, P 2001, “Welfare and Macroeconomic Interdependence”, The Quarterly Journal of Economics, vol 116, p 421-445 Corsetti, G., Meier, A., Muller, G 2010, “Cross-Border Spillovers from Fiscal Stimulus”, International Journal of Central Banking, vol 6, pp 5-35 Corsetti, G., Muller, G 2011, “Multilateral Economic Cooperation and the International Transmission of Fiscal Policy”, Chicago Scholarship Online, DOI:10.7208/chicago/9780226030890.003.0008 Dees, S., Mauro, F., Pesaran, M., Smith, L., “Exploring the international linkages of the euro area: a global var analysis”, Journal of Applied 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“International Transmission of Fiscal Policies in Major Industrial Countries”, Palgrave Macmillan Journals, vol 33, no 3, pp 387-438 Mundell, R, A., Capital Mobilityand Stabilization Policy Under Fixed and Flexible Exchange Rates in International Economics, New York: Macmillan, 1968 Nicar, S 2015, “International Spillovers from U.S Fiscal Policy Shocks”, Open Economics Review, voL.26, no.5, pp 1081–1097 Nickel, C Vansteenkiste, I 2013, “The international spillover of fiscal spending on financial variables”, Oxford Scholarship Online, DOI:10.1093/acprof:oso/9780199670086.003.0012 Reinhart, C M 1988, "Commodity Markets and the International Transmission of Shocks," IMF Working Paper 500 ... 70% of the total import-export turnover of Vietnam The paper will focus on answering the following questions whether there are spill-over effects of fiscal policy between Vietnam and its trading. .. interdependence between the local currency purchasing power and the fiscal policy in Vietnam? ??s trading partner countries Therefore, the impact of world fiscal policy on the real money balance of Vietnam. .. China, Japan, Korea, Malaysia, and Thailand 4.3 The effect of the world fiscal policies on Vietnamese output Table 4: The GIRFs of output in Vietnam from its trading partners Countries Australia