Revisiting the Validity of the Weak Currency Policy: Evidence from Vietnam’s Export and Import Demand

Abstract

Abstract:This paper revisits the validity of the weak currency policy in Vietnam. It estimates the income and exchange rate elasticities of Vietnam’s bilateral export and import demand with its twenty-three trading partners between 1994 and 2016. The Fully Modified OLS (FMOLS) estimates suggest that the income elasticities of both export and import demand are consistently significant and more elastic with expected positive signs. Meanwhile, the exchange rate elasticities are inconsistent in terms of their size, sign and statistical significance. In general, bilateral import demand, compared to bilateral export demand, shows considerably inelastic exchange rate elasticity with signs that are opposite to expectation. Only three countries satisfy the Marshall-Lerner condition. Also, the influence of income over trade balance outweighs that of exchange rate. The weak currency policy that was once claimed to be effective is now ineffective in Vietnam as the country’s external sector is dominated by foreign-invested enterprises.