Exchange rate volatility and its effects on trade performance in Vietnam: Empirical evidence from aggregate, bilateral and sectoral trade data levels

Abstract

The main purpose of this thesis is to examine five research questions with respect to what extent exchange rate volatility affects Vietnamese international trade performance through applying dynamic panel models with data from 2000 to 2012. These research questions include: 1. What effects does exchange rate volatility have on Vietnam's international trade flows? 2. Are the effects equal or different between aggregate, bilateral, and sectoral data? 3. Why use the generalised method of moments (GMM) to analyse the impact of exchange rate changes on the trade performance of Vietnam? Is it appropriate? 4. Whether or not a different method of volatility measurements reveals a different trade effect? 5. What measures do governmental policy makers in Vietnam need to implement so as to develop suitable exchange rate policies in order to encourage international trade of this country? The thesis is divided into eight chapters. Chapter 1 introduces background information, research problem, expected contributions, research objectives and outline of the thesis. Chapter 2 presents Vietnamese exchange rate policy and statistically analysis of merchandise trade of this country. Chapter 3 provides literature reviews of previous studies on the effects of exchange rate instability on trade, focusing on measures of exchange rate variations, methods and techniques of estimations and results. Chapter 4 is an exploration of methodology using an empirical research model, including a formulation of the equations which make up the econometric model. The next three chapters present empirical results of the impacts of exchange rate volatility on Vietnamese trade performance at three different data levels, in each chapter there is a brief description of variables, data and model specification. Chapter 5 reports the empirical results of the effects of exchange rate instability on the trade of 53 countries including Vietnam, at the aggregate trade data level. Chapter 6 discusses the empirical results of the impact of exchange rate volatility on Vietnamese trade at the bilateral trade data level. Chapter 7 presents this empirical result at the sectoral level. Chapter 8 deals with a summary and conclusion of the study, as well as its limitations and suggestions for further research directions. The main findings, based on the empirical study undertaken to examine the impacts of exchange rate volatility on trade performance of Vietnam at three data levels, are now summarised. In total, there were 32 equations estimated. Firstly, exchange rate volatility has statistically significant impacts on Vietnam’s trade performance in the majority of the 32 trade equations. Secondly, the impact of exchange rate volatility on trade differs between different trade data levels. While exchange rate instability has mostly significant positive impacts on exports in the aggregate level, its effects are mostly significant and negative in the bilateral and sectoral level. Further, a volatile exchange rate has no significant impact on imports at the aggregate level; its effects are significant and positive in most import equations at bilateral and sectoral level. Thirdly, exchange rate volatility can have either a positive or negative impact on trade performance. For aggregate, bilateral and sectoral levels, volatility has a statistically significant positive impact on trade flows in 3, 1 and 8 equations respectively, and a statistically significant negative effect in 0, 2 and 5 equations respectively. Fourthly, for all the equations analysed there are more export equations than import equations (12 vs 7) in which exchange rate volatility has a statistically significant impact on trade flows. This suggests that Vietnam's exports are more sensitive than imports to exchange rate volatility. In the majority of estimated equations, exchange rate volatility has a statistically significant negative effect on exports, while its impact on imports is statistically significant and positive. Fifthly, generally there is a large overall difference between the results produced with MOVSD-derived volatility measures and those with GARCH-derived volatility measures. Specifically, in terms of the number of equations in which volatility has a statistically significant impact on trade flows, these numbers (using MOVSD-derived measures vs GARCH-derived measures) are 2 vs 1, another 2 vs 1, and 9 vs 4 for aggregate, bilateral and sectoral levels respectively. The findings in this thesis make a strong case for more careful macroeconomic management, in order to boost Vietnam's overall trade and economic growth strategy, particularly in the light of Vietnam’s many years of persistent trade deficit. In practice, macroeconomic policies that enhance exports and limit imports should be implemented. In general, policy makers should develop policies, under which greater stability of exchange rate of VND will be maintained, in order to improve the country’s trade balance.