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Real effective exchange rate: A transmission channel for the impact of economic growth on exports in Vietnam

This article analyzes the role of real effective exchange rate as a transmission channel for the impact of economic growth on Vietnam’s exports. Using quarterly data for the period of 1994–2013, the analysis results show that economic growth, real effective exchange rate (REER), and exports tend to fluctuate in the same direction. | Nguyen Quang Hiep & Nguyen Thi Nha / Journal of Economic Development 23(1) 121-136 121 Real Effective Exchange Rate: A Transmission Channel for the Impact of Economic Growth on Exports in Vietnam NGUYEN QUANG HIEP Hung Yen Industrial College – nqhsta@gmail.com NGUYEN THI NHA Hung Yen Industrial College – nthsta@gmail.com ARTICLE INFO ABSTRACT Article history: This article analyzes the role of real effective exchange rate as a transmission channel for the impact of economic growth on Vietnam’s exports. Using quarterly data for the period of 1994–2013, the analysis results show that economic growth, real effective exchange rate (REER), and exports tend to fluctuate in the same direction. Furthermore, according to the results of the VAR model, economic growth impacts on and promotes export growth through increased productivity that improves the competitive advantage of products. The exchange rate, as an important channel, allows for a positive impact of economic growth on exports in Vietnam. Received: Jan. 21. 2015 Received in revised form: May. 07. 2015 Accepted: Dec. 30 2015 Keywords: Verdoorn’s Law. economic growth, real effective exchange rate, exports. 122 Nguyen Quang Hiep & Nguyen Thi Nha / Journal of Economic Development 23(1) 121-136 1. Introduction Exchange rate, in its close relation to macroeconomic outcomes, is considered an important factor to affect the competitiveness of goods in foreign trade as well as other economic variables. The fluctuation in exchange rate may alter the relative prices of goods/services through domestic and foreign currencies and thus significantly affect import-export activities. In reality, an increase in effective exchange rate index leads to VND’s real-value depreciation and higher international trade competitiveness, which contributes to export improvement. Conversely, the effective exchange rate index, in its decreasing trend, causes VND’s appreciation, weakened competitiveness, and thereby reducing export growth