Dissertation

Exchange rate and trade balance relationship

Table of Content
List of Figures 3
Introduction 4
1.1 Rationales for chosen topic .......................................................................................... 4
1.2 Research objectives ...................................................................................................... 5
1.3 Research question ........................................................................................................ 5
1.4 Research subjects ......................................................................................................... 5
1.5 Research scope ............................................................................................................. 6
1.6 Research approach ....................................................................................................... 6
1.7 Research structure ........................................................................................................ 6
Chapter 2. Literature Review......................................................................................................... 8
2.1 Theoretical frame ......................................................................................................... 8
2.1.1 The J curve effect ........................................................................................................... 8
2.1.2 The Marshall-Lerner conditions .................................................................................... 9
2.2 Literature Review....................................................................................................... 11
2.2.1 Literature review .......................................................................................................... 11
2.2.2 Hypothesis development .............................................................................................. 12
Chapter 3. Methodology .............................................................................................................. 14
3.1 Calculate bilateral real exchange rate to U.S dollar ................................................... 14
3.1.1 Bilateral real exchange rate .......................................................................................... 14

3.1.2 Real effective exchange rate (REER) .......................................................................... 15
3.2 Regression models related to exchange rate, import-export and inflation ................. 17
Chapter 4. Results and Discussion .............................................................................................. 20
4.1 Impact of VND/USD exchange rate to export and import ........................................ 20
4.2 Impact of real exchange rate on export-to-import ratio ............................................. 22
4.3 Impact of multilateral real exchange rate on export-import ratio .............................. 23
Chapter 5. Conclusions ................................................................................................................ 26
References 27


List of Figures


Figure 2-1 The J curve effect .......................................................................................................... 7
Figure 2-2 The Marshall-Lerner conditions .................................................................................... 9
Figure 4-1 Impacts of exchange rate to export.............................................................................. 20
Figure 4-2 Impacts of exchange rate to import ............................................................................. 21

Introduction


1.1 Rationales for chosen topic
Is the current rate appropriate for the economy of Vietnam? Which objectives of the
exchange rate policy need to achieve to ensure the competitiveness of goods or provide a
stable environment for development? There are many different perspectives on these issues.
Besides, how the State Bank intervene the formation and movement of exchange rate is also
controversial topic. It is argued that the State Bank should devalue greatly the Dong currency
against the current exchange rate to improve the competitiveness of exports and propose fully
floating exchange rates for the market to determine the appropriate rate (Cavoli and Rajan,
2009; Takagi and Pham, 2011; Pham and Riedel, 2012). However, there are also opposite
opinions which the exchange rate policy needs to stabilize (i.e. the exchange rate will be
more fixed) to stabilize the macro-economy, price stability and inflation control (Nguyen and
Nguyen, 2009; Nguyen, 2009; Abbott and Tarp, 2012).
As stated in Aizenman et al. (2010), to assess the level of appropriateness for the economy
of the current exchange rate, it is necessary to have a scientific base to compare. Accordingly,
State bank should determine the level of the exchange rate target for the economy. At this
rate, it is possible to deal with issues such as competitiveness of goods or macro-economic
environment stability or some other governmental objectives. Actual exchange rate,
especially in the multilateral actual exchange rate is adjusted according to inflation
differential of Vietnam compared to its partners (Le and Vinh, 2011). Therefore, it could be
the appropriate exchange rate targeting for the State Bank to assess the appropriate level of
the current exchange rate for some of these objectives above, especially ensuring the
competitiveness of goods. Currently, there are some models to determine the exchange rate
targeting such as model by economist Edwards and Van Wijnbergen (1989); Cheung et al.
(2005); Engel (2006); Juselius (2010); Chou and Lin (2011); Hauner et al. (2011) estimating
the long term, equilibrium real exchange rate; open macroeconomic model in which
financial, monetary markets and other macro-economic policies are linked in a whole in order
to assess the impact of policies on the economy. It also allows evaluating impact of exchange
rate policies on the current account balance, capital balance; internal equilibrium model and
external balance; real rate model allows evaluating the competitiveness of the goods etc.

Within the scope of this thesis, one of the methods above is presented to determine the
exchange rate targeting, which is the real multilateral exchange rate model (also known as the
real effective exchange rate). The multilateral real exchange rate is chosen because it is
suitable for the early currency market of Vietnam. The rate is expected as an important base
for the State Bank to adjust exchange rate towards the exchange rate parity to maintain the
competitive position of Vietnamese goods, and can also ensure the exchange rate achieve the
long term equilibrium level.
1.2 Research objectives
 Calculating the real exchange rate and evaluating its impacts on Vietnam’s export
and import activities aim to contribute an additional perspective, an opinion for the
exchange rate fluctuations and operational policies of the current rate of the State
Bank of Vietnam.
 At the same time, analysis is carried out to evaluate the credibility of the
multilateral real exchange rate in determining if Dong currency is set high or low
or not and the level of its impact on the competitiveness of goods.
 Through the real exchange rate, judgments are also made about the exchange rate
policy, the impact of exchange rate policy on the competitiveness of Vietnamese
goods, giving the forecast rate prices for to ensure purchasing power parity
compared to other major trading partners. Besides, some measures are suggested to
improve the exchange rate mechanism in accordance with the case of Vietnam.
Thereby, a favorable environment is created helping exchange rate fulfill its role
for the economy, in which its role is a supporting tool to maintain competitiveness
of Vietnamese goods in international trade.
1.3 Research question
 Does trade balance have a linear relationship with the exchange rate in Vietnam?
 Does bilateral real exchange rate have proportional effects on export to import
ratio in Vietnam?
 Does multilateral real exchange rate have proportional effects on export to import
ratio in Vietnam?

1.4 Research subjects
 The exchange rate of Vietnam Dong compared to some other currencies of major
trading partners with Vietnam as well as exchange rate of domestic currency of
these partners to USD
 CPI, export value of Vietnam with major trading partners mentioned above. The
growth rate of gross national product of Vietnam (GDP) and other trading partners
 Vietnam’s import and export value
1.5 Research scope
The exchange rate of some countries and territories to Vietnam Dong (Dong) and to USD
are the scope of the research. Currencies from countries and territories are chosen to join the
currency basket to calculate the real exchange rate for Dong and the U.S dollar by year. In the
currency basket, there are more than 10 chosen ones which are SGD (Singapore), THB
(Thailand), TWD (Taiwan), KRW (Korean), JPY (Japan), CNY (China), EUR (Germany and
France), USD (United States). Besides, when calculating the real exchange rate on quarterly
basis, only exchange rates of 7 currencies out of 10 currencies are chosen due to having
difficulty in seeking for data.
Vietnam’s import and export data with trading partners, CPI of Vietnam and partners,
exchange rate of Vietnam Dong with these partners are collected during the period from the
first quarter of 1999 to the fourth quarter of 2011.
1.6 Research approach
In the thesis, many methods are used such as analysis, statistical description, quantitative
analysis and regression. Data sources from General Statistics Office (GSO), Joint Stock
Commercial Bank for Foreign Trade of Vietnam (VCB), Ministry of Finance, International
Monetary Bank (IMF), World Bank (WB), and Asian development bank (ADB), online site
from organization for economic cooperation and development (OECD), Asia Pacific
Economic Cooperation (APEC), Association of South East Asian Nations (ASEAN),
Ministry of Labor (United States), United States Federal Reserve (FED) etc published the
period of around 10 years from 1999 to 2011. Data is aggregated, calculating the multilateral
real exchange rate of Vietnam, the bilateral real exchange rates of the currencies of country

partners (currencies which are used in currency basket in the multilateral real exchange rate)
compared to U.S dollar.
1.7 Research structure
Structure of the thesis consists of four chapters:
 Chapter I: General introduction about the dissertation including research topic,
objectives and scope.
 Chapter II: Literature review on relationship between exchange rate and trade
balance as well as dissertation hypothesis development
 Chapter III: Presentation of research method used in order to achieve the study
purposes.
 Chapter IV: Empirical results for impacts of real exchange rate on import and
export activities in Vietnam
 Chapter V: Conclusion and recommendation

This document is provided by:
VU Thuy Dung (Ms.)
Manager

Center for Online Writing Resources

Facebook : https://www.facebook.com/vu.thuydung.5076
Email : assignmentsource@gmail.com
Blogger : http://assignmentsource.blogspot.com/
Website : http://assignmentsource.com/