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MINISTRY OF EDUCATION AND TRAINING UNIVERSITY OF ECONOMICS HCM CITY - THE TRANSMISSION OF FISCAL POLICY FROM COUNTRIES WITH TRADE RELATIONS TO VIETNAM: GVAR MODEL APPLICATION Major: Finance – Banking Code: 9340201 SUMMARY ECONOMICS DOCTOR DISERTATION TP.HCM, 2020 The work was completed at: University of Economics Ho Chi Minh City Science instructor: Associate Professor Nguyễn Thị Liên Hoa Reviewer 1: Reviewer 2: Reviewer 3: The thesis will be defended before the School Council meeting at At the time of day month year Can read the thesis at the library: 20 CHAPTER 1: INTRODUCTION LIST OF PUBLISHED WORKS Science magazine 1.1 Background (2017 ) Financial Development, International Trade, When economies are open and integrated with the rest of the and Stock Market Integration: Evidence in Six Southeastern world through international trade, shocks from one country can spread Asia Countries to other countries through different channels Therefore, the cross- border effect of fiscal policy has become a common academic concept (2018 ) The impact of trade openness on the level of the transmission of exchange rate into inflation in Vietnam Research projects (2017): Many theories help explain the transmission mechanism of international fiscal policy and draw different conclusions (Frenkel & Head of Project: Transmission of fiscal policy among Razin, 1985, 1987; Fleming, 1962; Mundell, 1963; Svensson, 1987; countries with trade relations: Application of GVAR model to Reinhart, 1988) They found three main transmission channels, Vietnam including interest rates, terms of trade, commodity prices, which could Member: The effect of trade openness to the degree of transmission of exchange rates into inflation in Vietnam Scientific conference (2018 ) Spill-Over Effect of Fiscal Policy between Vietnam and Its Trading Partners ISBN 978-604-922-660-1 affect household consumption and output This transmission can create a "prosper-thy-neighbor" effect, if the fiscal stimulus abroad leads to an increase in domestic output or the "beggar-thy-neighbor" effect, if these effects are opposite Not only academically, the transmission of international fiscal policy is also a matter of concern to policymakers around the world In an interview with the Financial Times on March 15, 2010, the head of the International Monetary Fund (IMF) and French finance minister, Christine Lagarde, said: “Berlin should consider boosting domestic demand to help deficit countries to compete and reorganize their public finance sector” This implies that the change in German government spending, considered the leading country of the European, could transform the economies of other countries in the region However, expanding the economy in large countries sometimes will not enhance the wealth of less-developed countries as mentioned in the research of Knight & Masson (1987) and Lewis (1980) The effect of international fiscal transmission may be altered by the various 19 factors in the macro economy, for example, price adjustment, scale 5.2 Contribution of the thesis and openness, and the condition of interest rate near the limit of zero 5.3 Limitations (Devereux & Yu, 2019) The financing mechanism for fiscal The GVAR model can handle common break points by using expansion is also a significant factor (Giorgio & Traficante, 2018) 1.2 Research gaps strong standard errors when considering the effects of foreign variables and based on the analysis of the impulse response function Since the global financial crisis in 2008, many researchers have rather than points estimate These break points creates a structural found that expansionary fiscal policy has become an effective breaks in the model and once these events take place it creates a stabilizing tool in boosting recessionary demand around the world, spillover effect to the rest of the countries For example, events in the when monetary policy also seems to reveal certain limits in dealing global economy that have occurred in history such as the 2008 with the global economic downturn (Auerbach & Gorodnichenko, financial crisis in the US, or the Asian financial crisis in 1997 2013, Corsetti & Müller, 2013) The transmission of foreign fiscal However, it did not handle specific break points for each model, such policy is also amplified when domestic monetary policy is having as country-specific shocks Handling of these individual breakpoints effective low interest rates (Blagrave et al., 2018) Therefore, in increases the number of parameters in the regression model and response to the global crisis, policy makers try to increase government reduces the stability of the model in terms of data limits spending to stimulate the declining world demand This raises concerns that fiscal expansion measures in one country may spread to other countries Sometimes, it can worsen policy goals pursued by other countries (Gambetti & Gallio, 2016) Beckman (2018) also demonstrates that the spread of foreign fiscal policy can reduce the host country's economic growth Therefore, incumbent policy executives are more likely to approve fiscal expansion as their trading partners loosen fiscal policy We can see that some countries will benefit from the difficult and political decisions of others Are policymakers' beliefs consistent with theoretical predictions and empirical evidence? So far, however, evidence of the extent of international spread of fiscal policy from countries that are considered "giants" of the world to small, emerging 18 CHAPTER CONCLUSIONS AN RECOMMENDATIONS countries like Vietnam is still limited Moreover, these quantitative 5.1 Implication of research findings and policy recommendations studies based on the typical baseline models predicting this cross- According to empirical results, an expansion of Chinese border spillover effect also provide insights in policymaking for government spending in the long run can increase Vietnam's terms of dealing with external forces from international fiscal policy trade, causing the price of goods in Vietnam to decrease because of Therefore, the thesis will contribute to the empirical evidence on the the substitute tradable goods between the two countries, giving estimates related to spillovers from fiscal shock of trading partners to Vietnam an export advantage The price of domestic goods has also Vietnam decreased, resulting in an increase in the purchasing power of the currency and thus driving Vietnamese household spending This will increase the output of Vietnam's economy Also according to Corsetti and Pesenti (2001), subtitute tradable goods will increase Vietnam's economic usefulness (increase in output), giving the "prosper-thyneighbor" effect Empirical results also find similar effects with the case of China The effects found in other countries are negligible or insignificant Besides China being Vietnam's major trading partner, South Korea, Japan, the United States, and Euro Area also had close trade 1.3 Objectives and research questions The thesis examines the fiscal policy transmission from the trading partners to Vietnam - a small economy, still heavily dependent on agricultural advantages and less resistant to external shocks The thesis will in turn explore whether or not the spread of fiscal policy from countries with trade relations to Vietnam and the change in the spread characteristics from different countries to the Vietnamese economy 1.4 Subject and the scope of study relations However, Vietnam has not yet exploited the trade potential The thesis studied the fiscal policy transmission from countries in these countries The author recognizes that these countries are with trade relations to Vietnam in the period 1995-2017 The thesis countries with the potential of the world's famous industry for high performed on the largest trade partners of Vietnam as China, South technology, and science Vietnam mainly competes with these Korea, Taiwan, Australia, Singapore, United States, Euro Area, countries only in terms of its agricultural potential with lower value Japan, Thailand, Indonesia, Malaysia, Philippines to clarify the products As a result, Vietnam does not seem to have benefited from interdependence between the economies that have trade relations with the fiscal expansion in these countries Thereby, the author also found each other This commercial partners expect to represent the entire that building and participating in the global supply chain is a method trade relations of Vietnam with total exports and imports to these that not only helps Vietnam increase its internal growth capacity and countries accounted for over 70% turnover of Vietnamese trade at the same time can benefit from the external fiscal shock 4 17 1.5 Research Methodology: The thesis uses the global vector reg autoregression model (GVAR) of Pesaran et al (2004), developed by prg rhog roug Dees et al (2007) to assess international spillover effects from the countries having trade relations with the Vietnamese economy 1.6 Summary of results and contributions of the thesis According to empirical results, an expansion of Chinese government spending in the long run can increase Vietnamese term of trade, causing the prices of Vietnamese goods to decrease because of 0.03 0.015 0.025 0.02 0.01 0.02 0.005 0.015 0.01 -0.005 0.005 -0.01 -0.015 -0.005 -0.02 -0.01 0.01 the substitute tradable goods between these two countries, giving Viet -0.01 Nam an export advantage The price of domestic goods has also -0.02 decreased, resulting in an increase in the purchasing power of the -0.03 currency and thus driving Vietnamese household spending This will -0.04 increase the output of Vietnam's economy -0.025 12 16 20 24 28 32 36 40 12 16 20 24 28 32 36 40 0.025 0.02 0.015 0.01 0.005 -0.005 -0.01 -0.015 12 16 20 24 28 32 36 40 -0.015 12 16 20 24 28 32 36 40 CHAPTER 2: THEORY BACKGROUND AND LITERATURE REVIEW rmg 2.1 Theory background 2.1.1 Transmission of fiscal policy through interest rates 2.1.2 Transmission of fiscal policy through consumer behaviour 2.1.3 Transmission of fiscal policy through terms of trade 2.1.4 Transmission of fiscal policy through other macro factors Table 1: Summary of transmission mechanisms for international fiscal policy * Expanding government spending with bonds: Interest rate - Increasing domestic income 0.1 0.08 0.06 0.04 0.02 -0.02 -0.04 -0.06 -0.08 -0.1 12 16 20 24 28 32 36 40 causes a rise in domestic interest rates, leading to a rise in the domestic currency Therefore, the increase in Figure 11: Vietnam's response to the increase in Chinese government spending 16 the economy in the first quarter increased the real money supply foreign demand leads to an increase in Increasing money supply will create pressure to reduce interest rates, foreign production thus increasing the current purchasing power of households and The above effect can be offset thereby boosting output in the economy This is similar to the theory when: of Obstfeld and Rogoff (1995), Corsetti, Meier and Muller (2010), -The increase in world interest arguing that an increase in government spending in major countries rates reduces the demand for foreign reduces world interest rates, thereby stimulating consumption and goods, making the output of foreign increase production countries decrease In the long term, the author also sees a decrease in real exchange * Expanding government spending rates, domestic prices of Vietnam and an increase in household by tax: spending and Vietnam's output Thereby, we can confirm the effect of - Sometimes, it does not affect "prosper-thy-neighbour" that the Vietnamese economy has received world interest rates so foreign output from the increase in Chinese government spending (Figure 21) may be constant Fiscal expansion * Expanding government spending with temporary debt: - Expectation of a future tax spreads along channels increase reduces short-term interest rates in the future so the current longterm interest rate decreases with increasing spending on foreign goods, so world output increases * Position of net capital inflows and spending mainly on foreign goods in both public and private sectors: -The decrease in domestic interest rate makes consumption of foreign goods increase, so the output of foreign countries may increase 6 15 * Expanding government spending Vietnam in the first quarter reduced Vietnam's demand for goods for by tax: -The increase in domestic income foreigners A decline in total demand for goods in the economy has and the increase in tax financing for led to a fall in Vietnam's domestic prices This is shown by the 1.1% government spending make foreign decline in the growth rate of Vietnamese domestic prices in Q1 (Table currency balances likely unchanged so 1) However, in this case, the Vietnamese people also increased their foreign output is not affected demand for foreign goods, causing the price of foreign goods to rise * Expanding government spending behavior Therefore, this impact has reduced Vietnam's real exchange rate in the second quarter Along with that, it also increased the demand of with money: Consumer increase Thereby, the increased real effective exchange rate of - Increasing inflation leads to an foreigners for Vietnamese goods As a result, Vietnam's domestic increase in current consumption, so prices increased in Q2, reaching 0.3% (Table 1) Through the above foreign output increases (if traded goods analysis, Vietnam's domestic prices are sensitive to the terms of trade are substituted) between Vietnam and China This is because the trade in goods * Expanding government spending Therefore, the behavior of the importer may change rapidly with in developed countries: -Increasing increases between Vietnam and China is primarily a substitute product currency commodity prices prices in developed countries, so the trade changes in the selling price and towards cheaper places This result is similar to the theory of Corsetti and Pesenti (2001), Obstfeld and Rogoff (1995) balance in developing countries may Consumer behaviour also changed in response to changes in the decrease (if consumption preferences of domestic prices of Vietnam by Chinese government spending shocks developing countries are high-value From there, it can have an impact on the output growth rate of the goods in another country) economy The growth rate of household spending increased by nearly * A part of government spending 1% in Q1 when domestic prices decreased, and decreased by 0.12% in Q2 when domestic prices increased The growth rate of output also for foreign goods: foreign changes, increasing by nearly 1% in the first quarter and decreasing domestic by 0.13% in the second quarter The increase in household spending output may decrease due to an increase and Vietnam's output is supported by an increase in the money supply -In production flexible increases prices: but growth in Q1 (up 3.7%) The slowdown in domestic price growth in 14 now, China, Korea, Japan, the United States, Euro Area are important in domestic goods prices, leading to a trade partners of Vietnam CHAPTER 4: RESULTS AND DISCUSSION decrease in household consumption 4.1 Results of GVAR model estimation foreign production increase because of 4.1.1 Testing unit root the decrease in world trade value, 4.1.2 Identify and estimate the models for each country leading to a smaller money supply than 4.2 Check for long-term relationships and persistent profile the demand The decrease of domestic -In rigid prices: Domestic and 4.3 Simultaneous effects and cross correlation between countries Terms of currency makes the trade balance 4.4 Fiscal analysis and variance decomposition from trading trade increase partner countries with Vietnam 4.4.1 The impact of fiscal policies of trade partner countries on Vietnamese household consumption 4.4.2 The impact of fiscal policies of trade partner countries on so domestic output also increases * Government spending only for domestic goods: -Increasing income increases Vietnam's output domestic trade, leading to an increase in 4.4.3 The impact of fiscal policies of trade partner countries on domestic prices and an increase in the Vietnam's real balance competitiveness 4.4.4 The impact of fiscal policy of the country's trading partners on leading to an increase in the foreign the terms of trade of Vietnam trade balance 4.4.5 The impact of fiscal policies of countries that are trading of foreign goods, -In the long term, increasing partners on Vietnam's domestic prices demand for foreign goods increases the 4.5 Discuss the research results price of foreign goods and reduces In the short run, the increase in Chinese government spending foreign household consumption It could has pushed Vietnam's real effective exchange rate to appreciate 0.6% be appeared if the tradable goods in the first quarter and downward adjustment to -1.2% in the second between quarter Vietnam's real effective exchange rates decline shows that the subtituted selling prices of Vietnamese goods are more competitive than foreign goods This will give an advantage to Vietnam's trade balance The opposite will happen if Vietnam's real effective exchange rate these two countries are 13 -The national scale is inversely proportional to the effect of foreign factors Particularly for Vietnam, the dataset on government spending, household consumption and gross domestic product is only reported spillover Macro 3.2.2 Vietnamese data processing by Denton-Cholette method - Trade openness is positively annually Therefore, the thesis used Denton-Cholette adjustment correlated with the effect of foreign technique Some studies, such as Chen (2007), Isaac et al (2015) spillover conducted a study comparing the results of decomposition to quarterly - Tight monetary policy increases data from annual data available They have shown that the Denton- the spillover effects of fiscal shock Cholette method produces accurate separation results and overcomes abroad the disadvantages of the original Denton (1971) method + If the interest rate is near the zero limit, it will create a negative spillover effect on foreign output Source: Author synthesized 3.2.3 Trade density matrices of countries in the sample The thesis uses matrices that change year by year, collected from IMF trade statistics This will help the trade matrices better reflect the macroeconomic events taking place in that year, thereby bringing about more appropriate impacts Through the results of the 2.2 Empirical studies calculation of the trade density matrix of Vietnam and its trading 2.2.1 Transmission of fiscal shock in developed countries partners, we can see that, in the period from from 1995 to 1999, Japan, Beckman (2018) focuses on the international effect of fiscal Korea, Taiwan, Singapore and Euro Area were the main trading policy in OECD countries The author presented evidence that the partners of Vietnam These countries always account for a large expected changes in fiscal policies of partner countries have explained proportion of the total import and export value of Vietnam Until 2000, most of the movement of domestic fiscal dynamics in a short time China began increasing its trade with Vietnam The reason is that from 1998 to 2015 The author argued that policymakers always during this period, China began to launch a program to expand global consider fiscal policy strategies of trade partners before establishing trade activities, preparing to join the WTO The proportion of China's domestic fiscal policy If incumbents expect their major trading trade gradually surpasses that of Korea By 2003, trade activities of partners to issue expanded fiscal policies, they are more likely to adopt Vietnam and the US were gradually improved and reached a high their own expansion policies Yet, when incumbents expect their proportion of trade after the Vietnam-US bilateral trade agreement partners to enact restrictive policies, they are less likely to finance officially came into effect in December 2001 The two main trading expansionary policies If not, they would boost foreign economies partners, China and the United States, have gradually replaced the leading positions of Singapore and Taiwan since 2009 From 2010 to 12 - Recursion process, and the dynamics of model can be analyzed using with repressive effects on their country Thus, foreign fiscal policy has generalized impulse response function (GIRFs) a spillover effect on the domestic economy - The persistent profile function (PP) is used to find the impact characteristics of the system or the individual shocks of each variable on the cointegration relationship in the GVAR model over time 3.2 Research data 2.2.2 Fiscal transmission from developed countries to developing countries Dias and McDermott (2004) used the vector error correction (VEC) method to perform regression according to the theoretical The dissertation collects a dataset from 1995Q2 to 2017Q4 for models of Corsetti and Pesenti (2001) for the case of Brazil and the 13 countries including Australia, China, Indonesia, Japan, Korea, USA The results are confirmed to be consistent with the theoretical Malaysia, Philippines, Singapore, Taiwan, Thailand, USA, Euro Area model of Corsetti and Pesenti (2001) when considering production, and Vietnam from IMF for all variables in the model Chinese household consumption and real money balances The long-term quarterly dataset on government spending, household spending, and relationship between world fiscal position and the real effective output are extracted from Datastream In addition, because of the exchange rate (REER) has shown that the currency appreciation is the completeness and uniformity in the real effective exchange rate calculation, this variable was chosen to be collected from the result of an expansionary fiscal policy shock CHAPTER 3: METHODS AND RESEARCH DATA European economic organization Bruegel In particular, the growth 3.1 Modelling the transmission of international fiscal policy under rate of government spending, the growth rate of household spending, the approach of GVAR the growth rate of output (GDP) is adjusted to eliminate inflation The thesis uses the global vector autoregression model (GVAR) factor to find real quantities for variables In addition, the real money of Pesaran et al (2004), developed by Dees et al (2007) to assess balances is calculated by dividing the nominal money supply M1 by spillover effects from trading partner countries on Vietnam's the consumer index (CPI) representing inflation These CPIs are all economy These trading partners include China, South Korea, Taiwan, converted to the same base year as 2010 Besides, the world oil price Australia, Singapore, United States, Euro Area, Japan, Thailand, index is taken from the average spot price of Brent crude oil, West Indonesia, Malaysia and the Philippines These countries account for Texas Intermediate, and Dubai Fateh crude oil price, sourced from over 70% of turnover of Vietnam’s foreign trade in 2017 (IMF Trade IMF Statistics) With the GVAR approach, this model allows for 3.2.1 Seasonal adjustment with the X-13A-S program interdependence between countries by combining the error correction All data of the variables included in the model are removed models of individual countries Thanks to this feature, we can consider seasonality through the adjustment program X-13A-S of IMF an individual country in a global context (Chudik & Pesaran, 2014) implemented in a two-step approach Individual model is linked to the rest of the world through foreign and 10 11 global characteristic variables Therefore, the spillover effects from improves foreign income, so it may affect terms of trade in Vietnam external shocks to domestic economic activities are found Thereby, and contribute to change the Vietnamese output Therefore, it is we can easily distinguish the different transmission characteristics necessary to consider the impact of increasing government spending between different countries in trade partner countries on Vietnam terms of trade Then, the thesis 3.1.1 Models of individual countries will conduct test the response of real money balances in response to To test whether the transboundary impacts of fiscal policy in foreign fiscal policy shocks This shows us the change in the trading partner countries can bring prosperity to Vietnam, the thesis purchasing power of the local currency and it can help us to explain studied this issue through five aspects: household consumption, the changes in household consumption and thus the impact on output output, money balance, domestic prices and terms of trade These Svensson (1987) pointed out that household spending may depend on factors may highlight positive or negative effects on the economy In the amount of real money they hold In addition, foreigners' demand this way, we can clearly see the nature of the international fiscal for domestic goods may also affect domestic prices of goods transmission in different countries to Vietnam Therefore, domestic goods prices are also a factor to help explain the First, the thesis examines the impact of foreign governments consumption behavior of Vietnamese people In this regard, the spending on the Vietnamese output We can find the effect of impact of international fiscal policy and domestic monetary policy on "prosper-thy-neighbour" when Vietnam's production receives positive domestic commodity prices is also studied effects from external shocks (Obstfeld & Rogoff, 1995) Conversely, Also according to Corsetti and Pesenti (2001), domestic prices if the impact is detrimental, it may be the "beggar-thy-neighbour" are affected by international fiscal and domestic monetary policies effect mentioned in the theoretical model of Corsetti & Pesenti (2001) The fluctuations of fiscal policy change the demand for goods between Second, the thesis will look at how foreign government countries thereby impacting on prices However, consumer behavior spending affects household consumption in Vietnam Household also depends on the money supply and the interest rate, representing consumption is one of the main components of GDP, helping us to the opportunity cost of current consumption compared to saving explain the change in output Moreover, it is also affected by the Therefore, the impact of world fiscal policy on domestic prices in increase in aggregate demand from the expansion of government Vietnam is also clarified in this model through the interdependence spending in trading partner countries (Frenkel & Razin, 1987, between the purchasing power of the local currency in relation to the Svensson, 1987) fiscal policy of trading partners with Vietnam Thirdly, the thesis would clarify the transmission mechanism of fiscal policy through terms of trade, domestic prices and real money balances Theoretically, the shock of government spending abroad 3.1.2 GVAR processes - Checking for weak exogenous properties ... countries that are considered "giants" of the world to small, emerging 18 CHAPTER CONCLUSIONS AN RECOMMENDATIONS countries like Vietnam is still limited Moreover, these quantitative 5.1 Implication... partners to Vietnam an export advantage The price of domestic goods has also Vietnam decreased, resulting in an increase in the purchasing power of the currency and thus driving Vietnamese household... spending This will increase the output of Vietnam's economy Also according to Corsetti and Pesenti (2001), subtitute tradable goods will increase Vietnam's economic usefulness (increase in output),
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