Luận văn thạc sĩ UEH determinants of current account in vietnam, an intertemporal approach

UNIVERSITY OF ECONOMICS INSTITUTE OF SOCIAL STUDIES

HO CHI MINH CITY THE HAGUE

VIETNAM THE NETHERLANDS

VIETNAM - NETHERLANDS

PROGRAMME FOR M.A. IN DEVELOPMENT ECONOMICS

DETERMINANTS OF CURRENT ACCOUNT

IN VIETNAM:

AN INTERTEMPORAL APPROACH

BY

DO NGUYEN KHANH LINH

MASTER OF ARTS IN DEVELOPMENT ECONOMICS

HO CHI MINH CITY, DECEMBER 2013

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UNIVERSITY OF ECONOMICS INSTITUTE OF SOCIAL STUDIES

HO CHI MINH CITY THE HAGUE

VIETNAM THE NETHERLANDS

VIETNAM - NETHERLANDS

PROGRAMME FOR M.A. IN DEVELOPMENT ECONOMICS

DETERMINANTS OF CURRENT ACCOUNT

IN VIETNAM:

AN INTERTEMPORAL APPROACH

A thesis submitted in partial fulfilment of the requirements for the degree of

MASTER OF ARTS IN DEVELOPMENT ECONOMICS

BY

DO NGUYEN KHANH LINH

Academic Supervisor:

NGUYEN VAN NGAI

HO CHI MINH CITY, DECEMBER 2013

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i

Acknowledgement

I would like to express sincere gratitude to my supervisor – Prof. Nguyen

Van Ngai for scientific guidance, patient encouragement and useful advices, which

he has provided throughout the time of preparation and accomplishment of this

paper.

I also would like to thank to Dr. Truong Dang Thuy who gave precious

comments on the draft.

Special thanks to Prof. Nguyen Trong Hoai, and Dr. Pham Khanh Nam for

guidance and support as our program administrators.

I also would like to give my deepest thanks to my parents, and my beloved

husband Thanh Binh for his brilliant advices, spiritual supports, and

encouragements.

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Table of Contents

Acknowledgement ....................................................................................................... i

Table of Contents ....................................................................................................... ii

List of tables .............................................................................................................. iv

List of figures ............................................................................................................ iv

Abbreviations .............................................................................................................. v

Abstract ..................................................................................................................... vi

CHAPTER 1: INTRODUCTION ........................................................................... 1

1.1 Problem Statement............................................................................................. 1

1.2 Research objectives and questions .................................................................... 3

1.3 Justification of the thesis ................................................................................... 3

1.4 Organization of the research .............................................................................. 4

CHAPTER 2: LITERATURE REVIEW ................................................................ 5

2.1 Introduction ....................................................................................................... 5

2.2 Definition of Current Account (CA) ................................................................. 5

2.3 Theoretical Literature Review ........................................................................... 5

2.3.1 The old approaches ..................................................................................... 6

2.3.2 The intertemporal approach ........................................................................ 8

2.3.3 Determinants of CA balance based on the intertemporal approach ......... 23

2.4 Empirical researches ........................................................................................ 27

2.5 Conceptual framework .................................................................................... 40

2.6 Chapter summary............................................................................................. 41

CHAPTER 3: DATA AND RESEARCH METHODOLOGY ............................. 42

3.1 Data .................................................................................................................. 42

3.2 Research Methodology .................................................................................... 43

3.2.1 Analytical Framework .............................................................................. 43

3.2.2 Model Specification .................................................................................. 44

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3.2.2.2 Cointegration Test ................................................................................. 45

CHAPTER 4: FINDINGS AND DISCUSSIONS ................................................ 50

4.1 Descriptive statistics ........................................................................................ 50

4.2 The dynamics of variables ............................................................................... 51

4.3 The correlation matrix ..................................................................................... 53

4.4 The regression result........................................................................................ 54

4.4.1 Unit Root Test ........................................................................................... 54

4.4.2 ARDL Test ................................................................................................ 55

CHAPTER 5: CONCLUSION AND POLICY IMPLICATION .......................... 59

5.1 Conclusion ....................................................................................................... 59

5.2 Policy implication ............................................................................................ 60

5.3 Limitations and directions for further studies ................................................. 60

5.3.1 Limitation.................................................................................................. 60

5.3.2 Further studies .......................................................................................... 61

REFERENCES .......................................................................................................... 62

APPENDICES ........................................................................................................... 68

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iv

List of tables

Table 2-1: Empirical studies about determinants of CA balance ............................. 33

Table 3-1: The measurements and expected signs of variables ................................ 43

Table 3-2: Critical values for Dickey Fuller test ....................................................... 45

Table 3-3: Critical values bounds for testing the hypothesis of no – cointegration

relationship. ............................................................................................................... 47

Table 4-1: Descriptive statistics ................................................................................ 50

Table 4-2: The correlation matrix of variables ......................................................... 53

Table 4-3: The values of stationary tests of all variables .......................................... 54

Table 4-4: The summary of result ............................................................................. 55

Table 4-5: Results of cointegration (m = 1) .............................................................. 56

Table 4-6: ARDL equations chosen with lowest AIC and SIC’s values .................. 56

Table 4-7: Estimated long – run coefficients using the ARDL approach ................. 57

List of figures

Figure 1-1: Current account of Vietnam from 1999 to 2012 ...................................... 2

Figure 2-1: Temporary fall in income ....................................................................... 15

Figure 2-2: Current account acts like a shock absorber ............................................ 22

Figure 2-3: The conceptual framework ..................................................................... 41

Figure 3-1: The Analytical framework ..................................................................... 44

Figure 4-1: The dynamics of variables ..................................................................... 52

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Abbreviations

ARDL : Autoregressive Distributed Lag

CA : Current Account

CPI : Consumer Price Index

ECM : Error Correction Model

GMM : Generalized Method of Moments

GSO : General Statistics Office of Vietnam

IFS : International Financial Statistics

IMF : International Monetary Finance

LDC : Least Developed Countries

NFA : Net Foreign Assets

OECD : Organization for Economic Co-operation and Development

REER : Real Effective Exchange Rate

USD : United States Dollar

VND : Vietnam Dong

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vi

Abstract

This study attempts to explain theoretically and examine empirically

influences of macroeconomics factors on the current account behavior in Vietnam

from 2000Q1 to 2010Q2. The study employs the intertemporal approach to build

the theory of Vietnam current account behavior’s determinants and applies

Autoregressive Distributed Lag method to estimate the model. Theoretically,

intertemporal approach was an approach broadly employed to decide determinants

of current account recently. It treats current account as an absorber for the economy

in facing a shock in income. The study discovers that initial net foreign assets, trade

openness, real effective exchange rate and inflation volatility have significant

relationships with current account in Vietnam.

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CHAPTER 1: INTRODUCTION

This study attempts to explain theoretically and test empirically influences of

macroeconomics factors on the current account behavior in Vietnam. The study

employs the intertemporal approach to build the theory of Vietnam current account

behavior’s determinant and applies autoregressive distributed lag method to

estimate the model. Theoretically, intertemporal approach was an approach broadly

employed to decide determinants of current account recently. It treats current

account as an absorber for the economy in facing a shock in income. Determinants

of current account will be determined based on this idea.

1.1 Problem Statement

The current account is a crucial indicator of a country’s economic

performance (Knight and Scacciavillani 1998). Current account deficit could

damage the economy in many ways. First, current account deficit that accompanies

by budget deficit leads to the increasing of debts (Krugman, 1987). According to

Ministry of Finance, public debt reached 52.6% of GDP, foreign debt hit 38.8% of

GDP in 2010 and was equal 56.6% compared to GDP in 2011. Second, in an

economy that applies fixed exchange rate regime and has weak foreign reserve, a

prolonged current account deficit may raise the probability of a monetary crisis

(Edwards, 2002). The Asian financial crisis in 1997 is a good example for this

situation. Third, a serious current account deficit raises people’s expectation of

depreciation that increases the volatility of the foreign exchange market. Altogether,

maintaining the balance of current account at suitable level is one of the majority

missions of macroeconomics policymakers. Consequently, strong understanding

about the determinants of current account balance becomes an important subject

that requires careful researches (Yang 2011).

Like most developing countries in the world, Vietnam mostly suffers from

the current account deficit over the past 12 years. There are two deficit periods of

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