MINISTRY OF EDUCATION AND TRAINING
UNIVERSITY OF ECONOMICS HCM CITY
-------------------------

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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Reviewer 1: ...........................................................................
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Reviewer 2: ...........................................................................
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Reviewer 3: ...........................................................................
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The thesis will be defended before the School Council meeting
at ...........................................................................................
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At the time


Asia Countries.

to other countries through different channels. Therefore, the cross-

2.

border effect of fiscal policy has become a common academic concept.

1.

(2018 ) The impact of trade openness on the level of

the transmission of exchange rate into inflation in Vietnam.
Research projects (2017):

Many theories help explain the transmission mechanism of
international fiscal policy and draw different conclusions (Frenkel &

Head of Project: Transmission of fiscal policy among

Razin, 1985, 1987; Fleming, 1962; Mundell, 1963; Svensson, 1987;

countries with trade relations: Application of GVAR model to

Reinhart, 1988). They found three main transmission channels,

Vietnam.

including interest rates, terms of trade, commodity prices, which could

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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2
factors in the macro economy, for example, price adjustment, scale

5.2 Contribution of the thesis

and openness, and the condition of interest rate near the limit of zero

5.3 Limitations

(Devereux & Yu, 2019). The financing mechanism for fiscal

The GVAR model can handle common break points by using

expansion is also a significant factor (Giorgio & Traficante, 2018).
1.2 Research gaps

strong standard errors when considering the effects of foreign
variables and based on the analysis of the impulse response function

Since the global financial crisis in 2008, many researchers have

rather than points estimate. These break points creates a structural


reduces the stability of the model in terms of data limits.

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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3

CHAPTER 5. CONCLUSIONS AN RECOMMENDATIONS

countries like Vietnam is still limited. Moreover, these quantitative

5.1 Implication of research findings and policy recommendations

studies based on the typical baseline models predicting this cross-

According to empirical results, an expansion of Chinese

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

relations. However, Vietnam has not yet exploited the trade potential

The thesis studied the fiscal policy transmission from countries

in these countries. The author recognizes that these countries are

with trade relations to Vietnam in the period 1995-2017. The thesis

countries with the potential of the world's famous industry for high

performed on the largest trade partners of Vietnam as China, South

technology, and science. Vietnam mainly competes with these

Korea, Taiwan, Australia, Singapore, United States, Euro Area,

countries only in terms of its agricultural potential with lower value

Japan, Thailand, Indonesia, Malaysia, Philippines to clarify the

products. As a result, Vietnam does not seem to have benefited from

rhog

roug

Dees et al. (2007) to assess international spillover effects from the
countries having trade relations with the Vietnamese economy.
1.6. Summary of results and contributions of the thesis
According to empirical results, an expansion of Chinese
government spending in the long run can increase Vietnamese term of
trade, causing the prices of Vietnamese goods to decrease because of

0.03

0.015

0.025

0.02

0.01

0.02

0.005

0.015

0

0.01

-0.03

currency and thus driving Vietnamese household spending. This will

-0.04

increase the output of Vietnam's economy.

-0.025
0 4 8 12 16 20 24 28 32 36 40

0 4 8 12 16 20 24 28 32 36 40

0.025
0.02
0.015
0.01

0.005
0
-0.005
-0.01

-0.015
0 4 8 12 16 20 24 28 32 36 40

-0.015
0 4 8 12 16 20 24 28 32 36 40

CHAPTER 2: THEORY BACKGROUND AND LITERATURE


4

8

12 16 20 24 28 32 36 40

causes a rise in domestic interest rates,
leading to a rise in the domestic
currency. Therefore, the increase in

Figure 11: Vietnam's response to the increase in Chinese government spending


16

5

the economy in the first quarter increased the real money supply.

foreign demand leads to an increase in

Increasing money supply will create pressure to reduce interest rates,

foreign production.

thus increasing the current purchasing power of households and

The above effect can be offset


- Sometimes, it does not affect

"prosper-thy-neighbour" that the Vietnamese economy has received

world interest rates so foreign output

from the increase in Chinese government spending (Figure 21).

may be constant.
Fiscal
expansion

* Expanding government spending
with temporary debt:
- Expectation of a future tax

spreads
along
channels

increase reduces short-term interest
rates in the future so the current longterm

interest

rate

decreases

with


decline in the growth rate of Vietnamese domestic prices in Q1 (Table

currency balances likely unchanged so

1). However, in this case, the Vietnamese people also increased their

foreign output is not affected.

demand for foreign goods, causing the price of foreign goods to rise.

* Expanding government spending

behavior

Therefore, this impact has reduced Vietnam's real exchange rate in the
second quarter. Along with that, it also increased the demand of

with money:
Consumer

increase. Thereby, the increased real effective exchange rate of

- Increasing inflation leads to an

foreigners for Vietnamese goods. As a result, Vietnam's domestic

increase in current consumption, so

prices increased in Q2, reaching 0.3% (Table 1). Through the above


changes in the selling price and towards cheaper places. This result is
similar to the theory of Corsetti and Pesenti (2001), Obstfeld and
Rogoff (1995).

balance in developing countries may

Consumer behaviour also changed in response to changes in the

decrease (if consumption preferences of

domestic prices of Vietnam by Chinese government spending shocks.

developing countries are high-value

From there, it can have an impact on the output growth rate of the

goods in another country).

economy. The growth rate of household spending increased by nearly

* A part of government spending

1% in Q1 when domestic prices decreased, and decreased by 0.12% in
Q2 when domestic prices increased. The growth rate of output also

for foreign goods:
foreign

changes, increasing by nearly 1% in the first quarter and decreasing

CHAPTER 4: RESULTS AND DISCUSSION

decrease in household consumption.

4.1 Results of GVAR model estimation

foreign production increase because of

4.1.1 Testing unit root

the decrease in world trade value,

4.1.2 Identify and estimate the models for each country

leading to a smaller money supply than

4.2 Check for long-term relationships and persistent profile

the demand. The decrease of domestic

-In rigid prices: Domestic and

4.3 Simultaneous effects and cross correlation between countries

Terms of

currency makes the trade balance

4.4 Fiscal analysis and variance decomposition from trading


4.4.3 The impact of fiscal policies of trade partner countries on

domestic prices and an increase in the

Vietnam's real balance

competitiveness

4.4.4 The impact of fiscal policy of the country's trading partners on

leading to an increase in the foreign

the terms of trade of Vietnam

trade balance.

4.4.5 The impact of fiscal policies of countries that are trading

of

foreign

goods,

-In the long term, increasing

partners on Vietnam's domestic prices

demand for foreign goods increases the


are


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13

-The national scale is inversely
proportional to the effect of foreign

factors

Particularly for Vietnam, the dataset on government spending,
household consumption and gross domestic product is only reported

spillover.

Macro

3.2.2 Vietnamese data processing by Denton-Cholette method

- Trade openness is positively

annually. Therefore, the thesis used Denton-Cholette adjustment

correlated with the effect of foreign

technique. Some studies, such as Chen (2007), Isaac et al (2015)

spillover.

2.2.1 Transmission of fiscal shock in developed countries

partners, we can see that, in the period from from 1995 to 1999, Japan,

Beckman (2018) focuses on the international effect of fiscal

Korea, Taiwan, Singapore and Euro Area were the main trading

policy in OECD countries. The author presented evidence that the

partners of Vietnam. These countries always account for a large

expected changes in fiscal policies of partner countries have explained

proportion of the total import and export value of Vietnam. Until 2000,

most of the movement of domestic fiscal dynamics in a short time

China began increasing its trade with Vietnam. The reason is that

from 1998 to 2015. The author argued that policymakers always

during this period, China began to launch a program to expand global

consider fiscal policy strategies of trade partners before establishing

trade activities, preparing to join the WTO. The proportion of China's

domestic fiscal policy. If incumbents expect their major trading


a spillover effect on the domestic economy.

- The persistent profile function (PP) is used to find the impact
characteristics of the system or the individual shocks of each variable
on the cointegration relationship in the GVAR model over time.
3.2 Research data

2.2.2 Fiscal transmission from developed countries to
developing countries
Dias and McDermott (2004) used the vector error correction
(VEC) method to perform regression according to the theoretical

The dissertation collects a dataset from 1995Q2 to 2017Q4 for

models of Corsetti and Pesenti (2001) for the case of Brazil and the

13 countries including Australia, China, Indonesia, Japan, Korea,

USA. The results are confirmed to be consistent with the theoretical

Malaysia, Philippines, Singapore, Taiwan, Thailand, USA, Euro Area

model of Corsetti and Pesenti (2001) when considering production,

and Vietnam from IMF for all variables in the model. Chinese

household consumption and real money balances. The long-term

quarterly dataset on government spending, household spending, and


spillover effects from trading partner countries on Vietnam's

the consumer index (CPI) representing inflation. These CPIs are all

economy. These trading partners include China, South Korea, Taiwan,

converted to the same base year as 2010. Besides, the world oil price

Australia, Singapore, United States, Euro Area, Japan, Thailand,

index is taken from the average spot price of Brent crude oil, West

Indonesia, Malaysia and the Philippines. These countries account for

Texas Intermediate, and Dubai Fateh crude oil price, sourced from

over 70% of turnover of Vietnam’s foreign trade in 2017 (IMF Trade

IMF.

Statistics). With the GVAR approach, this model allows for

3.2.1 Seasonal adjustment with the X-13A-S program

interdependence between countries by combining the error correction

All data of the variables included in the model are removed

models of individual countries. Thanks to this feature, we can consider



will conduct test the response of real money balances in response to

To test whether the transboundary impacts of fiscal policy in

foreign fiscal policy shocks. This shows us the change in the

trading partner countries can bring prosperity to Vietnam, the thesis

purchasing power of the local currency and it can help us to explain

studied this issue through five aspects: household consumption,

the changes in household consumption and thus the impact on output.

output, money balance, domestic prices and terms of trade. These

Svensson (1987) pointed out that household spending may depend on

factors may highlight positive or negative effects on the economy. In

the amount of real money they hold. In addition, foreigners' demand

this way, we can clearly see the nature of the international fiscal

for domestic goods may also affect domestic prices of goods.

transmission in different countries to Vietnam.

Therefore, domestic goods prices are also a factor to help explain the


also depends on the money supply and the interest rate, representing

consumption is one of the main components of GDP, helping us to

the opportunity cost of current consumption compared to saving.

explain the change in output. Moreover, it is also affected by the

Therefore, the impact of world fiscal policy on domestic prices in

increase in aggregate demand from the expansion of government

Vietnam is also clarified in this model through the interdependence

spending in trading partner countries (Frenkel & Razin, 1987,

between the purchasing power of the local currency in relation to the

Svensson, 1987).

fiscal policy of trading partners with Vietnam.

Thirdly, the thesis would clarify the transmission mechanism of
fiscal policy through terms of trade, domestic prices and real money
balances. Theoretically, the shock of government spending abroad

3.1.2 GVAR processes
- Checking for weak exogenous properties