Author
Variables used | Stage | Model | Relationship type | Transmission channel impact | ||
Seyfettin and Cagri (2014) | THNS, THVL | 2001 - 2012 (quarterly) | Co-integration, control Perseran | Symmetry | Paradox | Not just leak |
Bakarr (2014) | THNS, THVL | 1980-2012 | ARDL | Symmetry | Homomorphic | GDP and status political instability |
Lau and Hock-Ann (2002) | THVL, THNS, ratio price, interest rate | 1976 - 2000 (quarterly) | VECM | Symmetry | Homomorphic | Live: THNS THVL Indirect: THNS Interest rate domestic currency appreciates (depreciates) THVL |
Baharumshah and Lau (2007) | THNS, exchange rate, interest rate, THVL | 1976 - 2001 (quarterly) | VAR | Symmetry | Paradox | Live: THNS THVL Indirect: THNS Interest rate THVL |
Bluedorn and Leigh (2011) | THNS, exchange rate, interest capacity, THVL | 1978-2009 | Homomorphic | THNS interest rate exchange rate THVL | ||
Mehmet and Filizz (2013) | THNS,THVL | 1990 - 2007 | Correlation form structured array | Symmetry | THNS interest rate exchange rate THVL | |
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The relationship between budget deficit and trade deficit in Vietnam - 21
Author
Variables used | Stage | Model | Relationship type | Transmission channel impact | ||
Eldemerdash et al. (2014) | Budget expenditure, | 1975 - 1998 | Data analysis | Symmetry | Homomorphic | Spending increases |
tax, savings, | array, multiplication | THVL increase. | ||||
investment, THVL, | Granger Fruit | Tax increase | ||||
THNS | THVL decreased. | |||||
Difference between periods | ||||||
savings and investment increase | ||||||
THVL decreased | ||||||
Tosun et al. (2014) | THNS, THVL | 1998-2010 | Border inspection | Symmetry | Monovariant (long) | Not just leak |
(Bound Test) and model | term), monotonous | |||||
ARDL image | and inversion | |||||
(in the short term) | ||||||
Antonakaris et al. (2016) | THTN, THTM | 1791- 2013 | Bound test and simulation QARDL image | Unequal worthy | Homomorphic | Not just leak |
Turan and Karakas (2018) | THNS, THVL, GDP | 1999-2016 | NARDL | Unequal worthy | Homomorphic (in the long term) | Not just leak |
Javed and Naresh ( 2018) | THNS, THVL, speed increase growth, economic openness | 1970 - 2016 | Bound test and NARDL | Asymmetrical | Homomorphic | THNS aggregate demand THVL |
Source: Author's synthesis from review studies
1.1.1.2. Viewpoint 2 - THTM is the cause of THNS
Many quantitative studies have concluded that this view is consistent with two possibilities of the relationship: positive or negative. Typical findings of the positive relationship are the work of Datta et al. (2012) for Bhutan and the work of Magazzino (2012) for Italy. In the case of Bhutan (period 1983 - 2002), the author used two variables, THNS and THVL, a simple multivariate regression model combined with cointegration and causality tests, and found that this relationship only exists in the long run. In the case of Italy, period 1970 - 2010, when tested using a VAR model including two variables, THTM and THNS, the relationship was confirmed to exist only in the short run but not in the long run. From there, the authors have made recommendations that in order to improve the national financial situation, the government should focus on policies that change the trade balance in a positive direction. A representative of the second group that showed an inverse relationship is Uçal and Bolukbas (2013) when studying Turkish data from 1996 to 2011. Using the same method as the two studies above, using two variables, THVL and THNS, the authors found that when THVL increased by 1% of GDP, THNS would decrease by 0.12%. The reason for this phenomenon, according to the authors, is that in Turkey, when THVL became increasingly severe, it increased the budget revenue mainly from import taxes , so THNS decreased.
Ngakosso (2016) in a study on the twin deficits in Congo from 1980 to 2013 also used a combination of the Bound test and the ARDL model to determine the cointegration relationship. With annual data, using only two variables, the budget balance and the current account balance, the study showed a positive relationship in which the budget deficit was the cause of the current account deficit. This relationship exists, according to the author, because Congo is an exporting country mainly based on resources. Therefore, the increase in the scale of this country's exports, which originated from increased world demand, improved the current account balance and contributed to a positive effect on production, reducing domestic unemployment. From there, the budget revenue was improved. However, the author also warns that although the export value has increased, if the government continues to let foreign companies be the main oil exploiters in the country, along with heavy dependence on fluctuations in oil prices and the US dollar, even if the export value increases, it may be accompanied by a decrease in budget revenue, thereby improving the current account balance, but the budget balance will be in deficit (negative relationship). The negative impact of THTM on THNS was also found by Turan and Karakas (2018) in Poland and Romania during the period 1999-2016, through testing using the NARDL model, but this relationship only exists in the long run.
Thus, although the above studies have a unified conclusion about the causal relationship, they are grouped into 2 in table 1.2 below (the direction of impact is from THTM
THNS) but they differ in the direction of variation between the two types of deficits (positive or negative) and the duration of the relationship (short-term or long-term). A common weakness of these studies is that they have not yet shown the transmission channel of the relationship. The author also found that the above studies were mainly conducted with symmetric models.
Table 1.2: Summary of studies following view 2
Author
Variables used | Stage | Model | Type relationship | Transmission channel impact | ||
Name | Type | |||||
Datta and co. event (2012) | THNS, THVL | 1983 - 2002 | OLS | Symmetry | Homomorphic | Not just leak |
Magazine (2012) | THTM, THNS | 1970 - 2010 | VAR | Symmetry | Homomorphic | Not just leak |
Ucal and Bolukabas (2013) | THNS, THVL | 1996 - 2011 (quarterly) | VAR | Symmetry | Paradox | Trade volume increases import tax increases THNS reduction |
The Last Airbender (2016) | THNS, THVL | 1980-2013 (by year) | Bound and model testing ARDL | Symmetry | Homomorphic | THVL decreases Economic growth increases THNS decreases |
Turan and Karakas (2018) | THNS, THVL | 1999-2016 | NARDL | Unequal worthy | Inverse variable | Not just leak |
Source: Author compiled from overview documents
1.1.1.3. Viewpoint 3- THNS and THTM influence each other (two-way relationship)
Not many studies have shown this relationship. In the US, with research data from 1960 to 1984, Darrat (1988) used a combination of tools such as 2-variable regression, 3-variable regression, maximum likelihood estimation, and Granger causality testing. In addition to the two main variables, THNS and THTM, the author also included related variables in the model such as: monetary base, real GDP, inflation, labor costs (represented by industrial wages calculated by hourly wages), exchange rate, short-term interest rate (represented by 3-month treasury bill interest rate), long-term interest rate (government bond interest rate) and foreign income. The causality test showed that: THNS and related variables (except foreign income) all have an impact on THTM, in which THNS and interest rate have the greatest impact, and at the same time confirmed the existence of a two-way and positive relationship between THNS and THTM. The phenomenon of parallel existence and two-way relationship between these two types of deficits is also found in some other simpler studies (using only
using two variables THNS and THTM), performing basic testing procedures combining VAR models such as Kouassi et al. (2004), Asrafuzzaman et al. (2013).
Table 1.3: Summary of studies following the 3-point perspective
Author
Variables used | Stage | Model | Relationship type | Impact transmission channel | ||
Name | Type | |||||
Darrat (1988) | THNS, THTM, mechanism monetary base, GDP, inflation, wages, exchange rate, interest rate, income imported from abroad | 1960 - 1984 | OLS | Symmetry | Homomorphic | Not just leak |
Kuassi and Works (2004) | THNS, THTM | 1960 - 1990 | VAR | Symmetry | Not just leak | |
Arfuzzaman and partner (2013) | THNS, THTM | 1972 - 2012 | VAR | Symmetry | Homomorphic | |
Source: Author compiled from overview documents
1.1.1.4. Viewpoint 4 - view point according to Ricardo's equilibrium theory: THNS and THTM exist in parallel but do not interact (independent of each other)
Kouassi et al. (2004) when examining data from 20 countries around the world found that in some countries in the research sample such as Columbia, India, Malaysia (period 1960 - 1990) there was no relationship between the two types of deficit. Similarly, Datta and Mukhopadhyay (2010) when examining the case of Maldives in the period 1979 - 2003, the research group proved that there was a double deficit but the THNS and THTM had absolutely no impact on each other. That is, according to the authors, there is a Ricardo effect (full Ricardo) in this island nation. The reason is that fiscal policy and foreign exchange market management policy are different and are implemented independently of each other.
In 2016, Mumtaz, K. and Munir presented their research results on twin deficits in four South Asian countries including Bangladesh, India, Pakistan and Sri Lanka. With a series of annual data from 1981 to 2014, using the variables THNS, THVL and private investment-savings balance to examine the phenomenon of twin deficits, Ricardo's equilibrium theory and Feldstein-Horioka's perspective (Feldstein-Horioka puzzle). The test results showed that there was no long-run relationship between the research variables in these countries and Ricardo's equilibrium theory simultaneously existed in both India and Pakistan. The reason was pointed out to be due to fiscal policy. From there, the policy suggestion that the group of authors made was that the government should focus on improving fiscal policy, increasing FDI attraction to create employment and income opportunities, thereby increasing private consumption.
Table 1.4: Summary of studies following the 4-point perspective
Author
Variables used | Stage | Model | Relationship type | ||
Name | Type | ||||
Kuassi et al. (2004) | THNS, THTM | 1960 - 1990 | VAR | Symmetry | Independence |
Datta and Mukhopadhyay (2010) | THNS, THTM | 1979 - 2003 | VECM | Symmetry | Independence |
Mumtaz, K. and Munir (2016) | THNS, THVL, balance of savings and investment | 1981- 2014 | VECM | Symmetry | Independence |
Source: Author compiled from overview documents
1.1.2. Studies on Vietnam
1.1.2.1. Classical view: THNS is the cause of THTM
A typical example of research on this issue in Vietnam is the work of Ho Chi Minh City University of Economics (2011) entitled “State budget deficit and current account deficit in Vietnam. Twin deficits or opposite duo?”. In this study, the authors used the VAR model, quarterly data from 1985Q1-2010Q4, with variables calculated as %GDP (THNS, THVL, government savings, private savings, government investment, private investment), real GDP, nominal GDP and growth rate. The overall research period from 1985-2010 was divided into 3 sub-stages, combining the use of both qualitative analysis and correlation matrix to examine the correlation of the two types of deficits. The results show that in the first period (from 1985-1995), the period when the economy was transformed from a centralized mechanism to a market mechanism and the first five-year plan was implemented, the relationship was positive with a correlation coefficient of 33.58%. In the second period (from 1996-2003), the period when the second five-year plan was implemented and indirectly affected by the Asian financial crisis, the relationship was negative with a small correlation coefficient of -4.25%. In the third period (from 2004-2010), the period when Vietnam was affected by the global financial crisis, the relationship was found to be positive with a fairly high correlation coefficient of 42.68%. The results show that in the whole period of 1985-2010, the THNS was the cause affecting the THVL. Therefore, recommendations are made in the direction of reducing the THNS to reduce the THVL. The government needs to increase tax revenue (increase the proportion of personal income tax in total budget revenue), reduce expenditures combined with increasing the efficiency of public expenditures, and increase the use of foreign capital for development investment expenditures (to limit the increase in budget expenditures). However, this study also has limitations in that it has not yet shown the transmission channel between the two types of deficits.
Also looking at Vietnam but with data from 2000Q1
- 2011Q3, Nguyen Hoang Nhu Thuy (2012) used variables THVL, THNS, interest rate
short-term, exchange rate. In which THVL is the dependent variable calculated as a % of GDP, the remaining variables are independent variables with THNS calculated as a % of GDP. Using the VECM model to test, the author comes to the conclusion that the variables used have a long-term relationship, meaning that THNS is the cause of THVL with a lag of 2 years. The two mechanisms of this relationship are as follows:
- Direct mechanism: increased budget expenditure increased consumption and investment increased imports increased GDP.
- Indirect mechanism: increased budget spending increased interest rates foreign capital flows in domestic currency appreciates, imported goods are relatively cheap domestic demand for imported goods increases increased trade deficit increased GDP.
In general, these studies have also made many efforts in using a variety of variables to study the relationship between the twin deficits in Vietnam during the period 1985-2011. Because the results obtained are similar (all in the direction of the impact of the deficit on the GDP) and all confirm the positive relationship, these studies have the same recommendation to improve the efficiency of budget revenue and expenditure combined with applying tight fiscal policy to improve the situation of the GDP in Vietnam.
1.1.2.2. Viewpoint 2- THTM is the cause of THNS
Research for Vietnam with the conclusion following the second viewpoint has the work of Trinh Thi Trinh and colleagues (2013), with the name "Analysis of the relationship between fiscal deficit and current account deficit in Vietnam" . Using the research data set in the period 1994 - 2012 with the VAR model, the variables used are fiscal deficit and current account deficit (both calculated as % of GDP), the research team concluded that fiscal deficit is the cause of fiscal deficit. Therefore, to overcome the fiscal deficit, the government needs to focus on overcoming fiscal deficit by limiting the trade deficit of goods and services, maintaining an attractive investment environment and improving competitiveness, and increasing the attraction of remittances.
In her doctoral thesis on the topic: "Twin deficit in Vietnam. Current situation and solutions", Nguyen Lan Anh (2018) has conducted a rather elaborate study. The author relied on the Mundel-Flemming model to build a VAR model consisting of 4 variables: Rate of change in the budget balance, rate of change in the current account balance, interest rate, exchange rate. The study used quarterly data in the period 2000Q1-2015Q4. With a model lag of 4, the author concluded: there is a twin deficit in Vietnam. The current account deficit is the cause of the budget deficit. The control variables are interest rate and exchange rate, which are not the transmission channels of this relationship because the relationship between the variables is defined as Interest rate Exchange rate Change in the current account balance Change in the budget balance. The author affirmed that
The causes of the twin deficit in Vietnam come from: (i) The imbalance between domestic savings and investment , in which savings are smaller than investment, has a negative impact on the current account balance. In addition, the current account balance has been persistent because it has to serve Vietnam's growth model. (ii) The imbalance of the roles of economic sectors . This is due to the fact that the state budget focuses on investing in a number of sectors, but these sectors do not promote economic efficiency. (iii) Economic crisis . This factor has negatively affected the current account balance (reduced revenue, increased expenditure), causing the twin deficit to develop at its worst during the research period. (iv) Exchange rate developments do not keep up with the market . Due to the slow adjustment of the exchange rate, the Vietnamese Dong (VND) is overvalued, thereby negatively affecting both the current account balance and the budget. To limit the twin deficits in Vietnam, the author proposed that the Government should focus resources on improving the current account balance first, then improving the budget balance. The group of solutions proposed by the author is divided into two groups: short-term and long-term. The short-term group focuses on how to finance the imbalances of each sector: the current account balance needs to be financed by foreign capital, foreign exchange reserves and reducing official reserve assets while the budget balance needs to be financed by domestic and foreign loans. The long-term group focuses on solutions on changing policies and mechanisms in both the budget and trade sectors, combined with changing the structure of import and export of goods and services, budget revenue and expenditure.
Thus, there are not many studies on Vietnam that have conclusions following point of view 2 and all of these works are carried out with VAR, which is a symmetric model.
1.1.2.3. Viewpoint 4 - view point according to Ricardo's equilibrium theory: THNS and THTM exist in parallel but do not interact (independent of each other)
According to this school, there is a study by Truong Thi Nguyet Hang and colleagues (2010). Using a data set from 1995Q1 - 2009Q4, the model used is SVAR, which is also a symmetric model. The research variables include GDP, THNS (calculated as a % of GDP), THVL (calculated as a % of GDP), 3-month interest rate, real exchange rate. When testing the response of variables to structural shocks, the authors found that the THNS shock has a significant impact (85.22%) on its own overall volatility (ie THNS) while output shocks only contribute 7.23% and other shocks have insignificant impacts. Then, the model was expanded by successively adding the variables of public investment, private investment and private expenditure (these variables are also calculated as a percentage of GDP and then taking the natural logarithm). The authors concluded: When the THNS increases (budget shock), the current account improves in the short run and the exchange rate changes insignificantly. Response to output shock: When output increases significantly, interest rates increase while the exchange rate fluctuates very little, THNS increases and THVL decreases in the short run. Thus, there is a dual deficit in Vietnam and the improvement in THVL is due to the increase in private savings.