Exchange Rate and Trade Balance

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1. Background of the study
Among various subjects in the field of international trade and monetary policy, the relationship between real exchange rate and trade balance is one of the most popular topics, attracting extensive studies in last couple decades. Although a lot of efforts have been made, international trade economists have yet come up with a convergence point in theory to explain the moving direction of trade balance as the result of currency depreciation or appreciation (Qiao, 2005). Empirical studies also show divergence results of this topic. (Koray and McMillins, 1998). Moreover most of the study has been conduct with economy with higher level
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Research Objectives and Questions
Research Objectives
The major aim of this dissertation is to study the relationship between real exchange rate and balance of trade in Vietnam since the interception of Renovation Policy. The cope of the study will especially focus on the period between 2007 and 2012, as Vietnam became the 150th members of the World Trade Organization (WTO) on the January 11th 2007.
Research questions: * What can we really conclude about the effect of depreciation or appreciation of Vietnamese Dong has on the trade balance? * Does the Marshall – Leaner conditions hold and J-curve exist in Vietnam during above-mentioned period? * Is that relationship significant enough so that policy can be conducted base on the conclusion of previous question? * In the case monetary authority choose to implement the result of previous questions, how long will it take for the exchange rate policy to really effect trade balance.
Terms of Reference
The result of this research could be implement by monetary authority in Vietnam to determine the real effect of forex policy on trade balance. Based on the result they can decide whether or not to implement such policy to fight trade deficit problem in Vietnam.
4. Theoretical Framework/Initial Literature Review
Definitions and theories
According to Krugman (2011) trade balance is the
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