Trade balance and exchange rate in Thailand & the implications for Vietnam: an application using instrumental variable and the heterogeneous panel cointegration methods

Abstract

This study aims to investigate the link of trade balance and exchange rate for the case of Thailand in different aspects by initially attempting to examine what factors determine the trade balance in Thailand and then to test the long-run relationship between the exchange rate and Thailand’s trade balance. The empirical findings indicate that the exchange rate and relative growth rate of income play central roles in explaining Thailand’s trade balance, and fiscal and monetary policies are beneficial in some cases. Additionally, panel fully modified ordinary least square (FMOLS) estimations illustrate that a devaluation of Thailand Baht offers a significantly positive improvement on its trade balance in the long run, especially for the groups of countries with upper middle and high income in America and Europe. Individual FMOLS regressions of Thailand’s trade balance and each of its 62 trading partners suggest that a devaluation of Thailand’s currency would stimulate Thailand’s trade performance with over 20 trading partners, but hurt its performance with the other 10 countries and be inconclusive to the others.