The impact of exchange rate on bilateral trade between Vietnam and China

Abstract

The goal of this paper is to investigate the short term and long term relationship between exchange rate and trade balance on the trade balance between Vietnam and China. Differing multivariate methods such as Johansen Cointegraion test, Vector Error Correction Model and monthly time series data spans from 2011:1 to 2015:12 have been employed. The results prove the relationship among trade balance, real exchange rate, domestic and foreign output or ML condition hold. The positive coefficient implies that the devaluation of Vietnamese currency will improve the bilateral trade between Vietnam and China. Last but not least, the prominent aim of this paper is to prove the existence of Purchasing Power Parity between Vietnam and China hold before examining the effect of real exchange rate to trade balance.