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. | Vo The Anh & Vo Hong Duc / Journal of Economic Development 23(1) 137-160 137 Trade Balance and Exchange Rate in Thailand & the Implications for Vietnam: An Application using Instrumental Variable and the Heterogeneous Panel Cointegration Methods VO THE ANH The Vietnam–Netherland Program, University of Economics HCMC – VO HONG DUC Open University of HCMC – ARTICLE INFO ABSTRACT Article history: 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. Received: Feb. 6 2015 Received in revised form: Sep. 17 2015 Accepted: Dec. 30 2015 Keywords: Exchange rate, trade balance, currency depreciation, instrumental variable, fully modified ordinary least square. 138 Vo The Anh & Vo Hong Duc / Journal of Economic Development 23(1) 137-160 1. Introduction Exchange rate has always been one of the most attractive topics among academics, exporters, importers, investors, and .
