Research on Determinants of Trade Balance in Vietnam: a VAR Approach

Dang Thi Kim Dung


Vietnam has experienced a long-lasting trade deficit in nearly 20 years (1993-2011), which brings a lot of negative effect to the economy. This fact requires the study of trade balance and the main factors affecting the trade balance of Vietnam so that policy makers in Vietnam can have appropriate adjustment to improve the situation of balance of trade. This study employs an unrestricted VAR model to examine determinants of trade balance in Vietnam. Quarterly data set of three endogenous variables and one exogenous variable from January 1997 to December 2014 is used in this paper. Overall, we find that trade balance in Vietnam is significantly negatively related to real domestic GDP per capita. A real depreciation of the real effective exchange rate index leads to an improvement of the trade balance. Particularly, the empirical result shows that a real foreign GDP per capita has a negative effect on the trade balance. About FDI, the model shows that FDI inflow has no impact to trade balance in overall in Vietnam.

Keywords: FDI, Real effective exchange rate, REER, Trade balance, VAR, Vietnam.

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