Testing J-curve phenomenon in Vietnam: An autoregressive distributed lag (ARDL) approach

Abstract

The assessment of factors having impacts on trade balance, especially exchange rate, is very important for effective implementation of macroeconomic policy. This paper investigates the existence of the short-run and long-run impacts of real exchange rate on trade balance in Vietnam by employing an Autoregressive Distributed Lag (ARDL) approach using quarterly data ranging from 2000Q1 to 2015Q4. Our results present the evidence of both short-term and long-term effects. In the short-run, Error Correction Model (ECM) based on ARDL approach indicates that real exchange rate has negative impact on trade balance. Also, impulse response functions based on ECM exhibit J-curve pattern of trade balance. In the long-run, real exchange rate has positive impact on trade balance. The stability of the long-run trade balance equations is also checked through CUSUM and CUSUMSQ stability tests