MINISTRY OF EDUCATION AND TRAINING
UNIVERSITY OF ECONOMICS HCM CITY
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THE TRANSMISSION OF FISCAL
POLICY FROM COUNTRIES WITH
TRADE RELATIONS TO VIETNAM:
GVAR MODEL APPLICATION
Major: Finance – Banking
Code: 9340201
SUMMARY ECONOMICS DOCTOR
DISERTATION
TP.HCM, 2020
The work was completed at:
University of Economics Ho Chi Minh City
Science instructor:
Associate Professor Nguyễn Thị Liên Hoa
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The thesis will be defended before the School Council meeting
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Can read the thesis at the library: ........................................
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LIST OF PUBLISHED WORKS
Science magazine
1. (2017 ) Financial Development, International Trade,
and Stock Market Integration: Evidence in Six Southeastern
Asia Countries.
2. (2018 ) The impact of trade openness on the level of
the transmission of exchange rate into inflation in Vietnam.
Research projects (2017):
1. Head of Project: Transmission of fiscal policy among
countries with trade relations: Application of GVAR model to
Vietnam.
2. Member: The effect of trade openness to the degree
of transmission of exchange rates into inflation in Vietnam .
Scientific conference
1. (2018 ) Spill-Over Effect of Fiscal Policy between
Vietnam and Its Trading Partners. ISBN 978-604-922-660-1
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CHAPTER 1: INTRODUCTION
1.1 Background
When economies are open and integrated with the rest of the
world through international trade, shocks from one country can spread
to other countries through different channels. Therefore, the cross-
border effect of fiscal policy has become a common academic concept.
Many theories help explain the transmission mechanism of
international fiscal policy and draw different conclusions (Frenkel &
Razin, 1985, 1987; Fleming, 1962; Mundell, 1963; Svensson, 1987;
Reinhart, 1988). They found three main transmission channels,
including interest rates, terms of trade, commodity prices, which could
affect household consumption and output. This transmission can
create a "prosper-thy-neighbor" effect, if the fiscal stimulus abroad
leads to an increase in domestic output or the "beggar-thy-neighbor"
effect, if these effects are opposite.
Not only academically, the transmission of international fiscal
policy is also a matter of concern to policymakers around the world.
In an interview with the Financial Times on March 15, 2010, the head
of the International Monetary Fund (IMF) and French finance
minister, Christine Lagarde, said: “Berlin should consider boosting
domestic demand to help deficit countries to compete and reorganize
their public finance sector”. This implies that the change in German
government spending, considered the leading country of the European,
could transform the economies of other countries in the region.
However, expanding the economy in large countries sometimes will
not enhance the wealth of less-developed countries as mentioned in
the research of Knight & Masson (1987) and Lewis (1980). The effect
of international fiscal transmission may be altered by the various
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factors in the macro economy, for example, price adjustment, scale
and openness, and the condition of interest rate near the limit of zero
(Devereux & Yu, 2019). The financing mechanism for fiscal
expansion is also a significant factor (Giorgio & Traficante, 2018).
1.2 Research gaps
Since the global financial crisis in 2008, many researchers have
found that expansionary fiscal policy has become an effective
stabilizing tool in boosting recessionary demand around the world,
when monetary policy also seems to reveal certain limits in dealing
with the global economic downturn (Auerbach & Gorodnichenko,
2013, Corsetti & Müller, 2013). The transmission of foreign fiscal
policy is also amplified when domestic monetary policy is having
effective low interest rates (Blagrave et al., 2018). Therefore, in
response to the global crisis, policy makers try to increase government
spending to stimulate the declining world demand. This raises
concerns that fiscal expansion measures in one country may spread to
other countries. Sometimes, it can worsen policy goals pursued by
other countries (Gambetti & Gallio, 2016). Beckman (2018) also
demonstrates that the spread of foreign fiscal policy can reduce the
host country's economic growth. Therefore, incumbent policy
executives are more likely to approve fiscal expansion as their trading
partners loosen fiscal policy.
We can see that some countries will benefit from the difficult
and political decisions of others. Are policymakers' beliefs consistent
with theoretical predictions and empirical evidence? So far, however,
evidence of the extent of international spread of fiscal policy from
countries that are considered "giants" of the world to small, emerging
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5.2 Contribution of the thesis
5.3 Limitations
The GVAR model can handle common break points by using
strong standard errors when considering the effects of foreign
variables and based on the analysis of the impulse response function
rather than points estimate. These break points creates a structural
breaks in the model and once these events take place it creates a
spillover effect to the rest of the countries. For example, events in the
global economy that have occurred in history such as the 2008
financial crisis in the US, or the Asian financial crisis in 1997.
However, it did not handle specific break points for each model, such
as country-specific shocks. Handling of these individual breakpoints
increases the number of parameters in the regression model and
reduces the stability of the model in terms of data limits.
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CHAPTER 5. CONCLUSIONS AN RECOMMENDATIONS
5.1 Implication of research findings and policy recommendations
According to empirical results, an expansion of Chinese
government spending in the long run can increase Vietnam's terms of
trade, causing the price of goods in Vietnam to decrease because of
the substitute tradable goods between the two countries, giving
Vietnam an export advantage. The price of domestic goods has also
decreased, resulting in an increase in the purchasing power of the
currency and thus driving Vietnamese household spending. This will
increase the output of Vietnam's economy. Also according to Corsetti
and Pesenti (2001), subtitute tradable goods will increase Vietnam's
economic usefulness (increase in output), giving the "prosper-thy-
neighbor" effect. Empirical results also find similar effects with the
case of China. The effects found in other countries are negligible or
insignificant.
Besides China being Vietnam's major trading partner, South
Korea, Japan, the United States, and Euro Area also had close trade
relations. However, Vietnam has not yet exploited the trade potential
in these countries. The author recognizes that these countries are
countries with the potential of the world's famous industry for high
technology, and science. Vietnam mainly competes with these
countries only in terms of its agricultural potential with lower value
products. As a result, Vietnam does not seem to have benefited from
the fiscal expansion in these countries. Thereby, the author also found
that building and participating in the global supply chain is a method
that not only helps Vietnam increase its internal growth capacity and
at the same time can benefit from the external fiscal shock.
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countries like Vietnam is still limited. Moreover, these quantitative
studies based on the typical baseline models predicting this cross-
border spillover effect also provide insights in policymaking for
dealing with external forces from international fiscal policy.
Therefore, the thesis will contribute to the empirical evidence on the
estimates related to spillovers from fiscal shock of trading partners to
Vietnam.
1.3 Objectives and research questions
The thesis examines the fiscal policy transmission from the
trading partners to Vietnam - a small economy, still heavily dependent
on agricultural advantages and less resistant to external shocks. The
thesis will in turn explore whether or not the spread of fiscal policy
from countries with trade relations to Vietnam and the change in the
spread characteristics from different countries to the Vietnamese
economy.
1.4 Subject and the scope of study
The thesis studied the fiscal policy transmission from countries
with trade relations to Vietnam in the period 1995-2017. The thesis
performed on the largest trade partners of Vietnam as China, South
Korea, Taiwan, Australia, Singapore, United States, Euro Area,
Japan, Thailand, Indonesia, Malaysia, Philippines to clarify the
interdependence between the economies that have trade relations with
each other. This commercial partners expect to represent the entire
trade relations of Vietnam with total exports and imports to these
countries accounted for over 70% turnover of Vietnamese trade.