สัญญาเลขที่ RDG5410004‌

สัญญาเลขที่ RDG5410004 ‌

รายงานการดําเนินงานโครงการ “จัดประชุม Bangkok Policy Forum : Macroeconomic policy strategies for growth and stability in Cambodia, Lao, Vietnam, and Thailand”

โดย

xxxxxxxxxxxxxx xx.xxxxxxxx xxxxxxxxx

มิถุนายน 2554

สนบสนุนโดยสํานักงานกองทุนสนับสนุนการวิจัย (สกว.)

(ความเห็นในรายงานนเป็นของผู้วิจัย สกว.ไม่จําเป็นต้องเห็นด้วยเสมอไป)

สารบัญ

1. รายงานการดําเนินการ และความคิดเห็นของผู้รบทุนโดยรวม 3

1.1 รายงานการดําเนินการ 3

1.2 ความคิดเห็นโดยรวมของ รศ.xx. xxxxxxxx xxxxxxxxx (ผู้รับทุน). 3

2. กําหนดการประชุม และรายชื่อผู้เข้าร่วมประชุม 4

2.1 กําหนดการประชุม 4

2.2 รายชอผู้เข้าร่วมประชุม 7

3. เอกสารประกอบการประชุม และขอคิดเห็นจากการประชุมแต่ละครั้ง 10

4. บทคดย่อภาษาไทย และภาษาอังกฤษ 17

4.1 Toward the Next Decade of Thailand’s Fiscal Decentralization: Learning from the past by Xxxxxx Xxxxxxxxxxxxx, Thammasat School of Economics 17

4.2 Xxxxxxxxxxxxx and the effectiveness of monetary policy in Cambodia by

Xxxxxx Xxx, National Bank of Cambodia 19

4.3 Exchange rate and Capital flows management in Vietnam by Xxxxxx Xxxx Xxx, Xxxxxx Xxxx Xxxx, and Xxxxxx Xxx Vu Ha, University of Economics and Business, Vietnam National University 21

4.4 Macroeconomic consequences of Thailand’s exchange rate policy by Xxxxxxxxx Xxxxxxxxxxx, Faculty of Economics, Thammasat University 23

4.5 Coping with capital inflows: Policy options for Laos by Xxxxxxxx Kyophilavongs, National University of Laos 24

4.6 Vietnam’s Exchange Rate and Monetary Policy by Xxxxxx Xxxx Xxxxx, and Xxxx xxx Xx, University of Economics and Business and Ministry of Finance 25

4.7 Fiscal stimulus in Viet Nam by Vu Quoc Huy, University of Economics and Business 28

4.8 Effectiveness of Macroeconomic Policies in Cambodia by Xxxx Xxxxx and Xxx Xxxxx, National Bank of Cambodia and Supreme Economic Council 29

4.9 Thailand’s fiscal policy for growth and price stability by Xxxxxxxxx Xxxxxxxxxxx, Thammasat University 31

Page | 1

4.10 A synthesis of macroeconomic policy strategy of CLTV countries by Xxxxxxxxxx Xxxxxx, Thammasat School of Economics 31

Page | 2

1. รายงานการดําเนินการ และความคิดเห็นของผู้รบทุนโดยรวม

1.1 รายงานการดําเนินการ

การจัดประชุม Bangkok Policy Forum : Macroeconomic Policy Strategies for Growth and Stability in Cambodia, Laos, Vietnam, and Thailand ในxxxxxx 19 – 20 พฤษภาคม 2554 มี วัตถุประสงค์เพื่อนําเสนอผลการศึกษาภายใต้ชุดโครงการ Macroeconomic Policy Strategies for Growth and Stability in Cambodia, Laos, Vietnam, and Thailand และนําข้อเสนอแนะxxxxxxรับจากการประชุม มาปรับแก้ไขเพิ่มเติมในงานวิจัย ซึ่งชุดโครงการวิจัยนี้จะสะท้อนถึงนโยบายเศรษฐกิจxxxxxxxxส่งผลอันพึง xxxxxxxต่อการเจริญเติบโตในระยะยาวและต่อเสถียรภาพของระบบเศรษฐกิจในประเทศดังกล่าวซึ่งมี โครงสร้างเชิงสถาบันที่แตกต่างกันและอยู่ในช่วงแห่งการพัฒนาทางเศรษฐกิจและการเงินที่แตกต่างกัน โดยมี การนําเสนองานวิจัยเชิงลึกรายประเทศทั้ง 4 ประเทศ คือ กัมพูชา ลาว เวียดนาม และxxx xxการกําหนดผู้ อภิปรายเพื่อวิจารณ์งานวิจัยเพื่อพัฒนาต่อไป และมีการเปิดโอกาสให้ผู้เข้าร่วมทั่วไปตั้งคําถามและแสดงความ คิดเห็น ในการจัดประชุมครั้งนี้มีผู้ให้ความสนใจเข้าร่วมการประชุมรวมทั้ง 2 วันทั้งหมด 36 คนตามที่กล่าวไว้ ในหวข้อ 2. กําหนดการประชุมและรายชื่อผู้เข้าร่วมประชุม มีการเสนอแนะข้อคิดเห็นต่อการนําเสนอบทความ วิจัยเพื่อแก้ไขและนําไปปรับปรุงเพิ่มเติมดังที่กล่าวไวในหัวข้อ 3. ของรายงานฉบับนี้

1.2 ความคิดเห็นโดยรวมของ รศ.xx. xxxxxxxx xxxxxxxxx (ผู้รับทุน)

ในภาพรวมการจัดงานสัมมนาในครั้งนี้xxxxxxประสบความสําเร็จเป็นอย่างดีในการสร้างเครือข่ายนักวิ ขาการลมแม่น้ําโขงระหว่างประเทศกัมพูชา ลาว เวียดนาม และไทย และจากการนําเสนอบทความวิจัยพบว่ามี ความxxxxxxxxในการทํางานของนักวิจัยอย่างมาก ในแง่ของเนื้องานพบว่าได้ข้อสรุปของการดําเนินนโยบาย เศรษฐกิจมหภาคในประเทศต่างๆดังกล่าวที่เป็นรูปธรรม ตัวบทความวิจัยส่วนใหญ่xxxxxxxxมีความครบถ้วน xxxxxxxแล้ว ในขณะนี้นักวิจัยกําลังนําข้อเสนอแนะและข้อคิดเห็นจากงานสัมมนาไปปรับปรุงแก้ไขบทความ วิจัยเพื่อทําการจัดพิมพ์เป็นรูปเล่มฉบับxxxxxxxต่อไป ในส่วนที่ควรปรับปรุงคือ ในแง่ของจํานวนและความ หลากหลายของผู้เข้าร่วมสัมมนา เนื่องจากการนําเสนอแต่ละบทความ จะมีผู้ทําหน้าที่วิจารณ์บทความเพียง หนึ่งท่าน การxxxxxจํานวนผู้วิจารณ์บทความและxxxxxความหลากหลายของตัวผู้วิจารณ์ให้ครอบคลุมทั้งกลุ่มนัก ปฏิบัติและนักวิชาการจะทําให้ข้อเสนอแนะมีหลากหลายแง่มุมขึ้น เนื่องจากในการจัดงานสัมมนาครั้งนี้มี ความxxxxxxxxxxไม่xxxxxxหาจํานวนและความหลากหลายของผู้วิจารณ์ดังที่กล่าวมาได้ ดังนั้นในxxxxxควร xxxxxในเรื่องของการเตรียมการและการxxxxผู้วิจารณ์ที่มีจํานวนมากขึ้นและหลากหลายขึ้น นอกจากนี้ยังพบ ปัญหาในเรื่องของการxxxxxสัมพนธ์ทกระชนชิด และปัญหาการxxxxxxงานเนื่องจากงานสัมมนาในครั้งนี้เกิด จากการร่วมกันจัดของหน่วยงานหลายภาคส่วน ในxxxxxxxxควรจัดระยะเวลาการประชาสัมพันธ์อย่าง เพียงพอ

Page | 3

2. กําหนดการประชุม และรายชื่อผู้เข้าร่วมประชุม

2.1 กําหนดการประชุม

Bangkok Policy Forum

Macroeconomic Policy Strategy for Cambodia, Laos, Thailand, and Vietnam

The Thailand Research Fund in collaboration with Faculty of Political Science Faculty of Economics, and Thammasat Business School

Thammasat University, Bangkok 19-20 May 2011

Page | 4

May 19, 2011

Sriburapha Auditorium

8:30-9:00 Registration

9:00-9:15 Opening Ceremony

9:15-9:45 Keynote Speech I

Xxxxx Xxxxx:

"Moving towards a fairer society: Economic realities, populist policies and development in Thailand and beyond"

9:45-10:30 Plenary Discussion: Dr. Xxxx Xxxxxxxxxx

10:30-11:00 Coffee Break

Thamnatee Building, Room 2

CHAIR: Xxxxxxxxx Xxxxxxxxxxx, Dean, Faculty of Economics

11:00-11:25 Toward the Next Decade of Thailand’s Fiscal Decentralization: Learning from the past

Xxxxxx Xxxxxxxxxxxxx, Thammasat School of Economics

11:25-11:40 Discussant: Xxxxxxxx Xxxxxxxxxxx, TSE

11:40-12:00 Open discussion

12:00-12:25 Xxxxxxxxxxxxx and the effectiveness of monetary policy in Cambodia

Xxxxxx Xxx, National Bank of Cambodia 12:25-12:40 Discussant: Xxxxx Xxxxxxxxxxx, TSE 12:40-13:00 Open discussion

13:00-14:00 Lunch

CHAIR: Xxxxxxxx Xxxxxxx,

Dean, Thammasat Business School

14:00-14:25 Exchange rate and capital flows management in Vietnam

Xxxxxx Xxxx Xxx, Xxxxxx Xxxx Xxxx, and Xxxxxx Xxx Vu Ha University of Economics and Business, Vietnam National University

14:25- 14:40 Discussant: Xxxxxx Xxxxxxxxxxxxxx, TBS

14:40-15:00 Open discussion

15:00-15:25 Macroeconomic consequences of Thailand’s exchange rate policy

Xxxxxxxxx Xxxxxxxxxxx, TSE 15:25-15:40 Discussant: Xxxxxx Xxxx Xxxxx 15:40- 16:00 Open Discussion

16:00-16 30 Coffee Break

Open Forum: Sriburapha Auditorium

18:30-21:00 A new social contract for Thailand: The way out of the transformation crisis?

Moderator: Dr. Xxxxxxxxxxx Songsamphan

Panelists: Dr. Xxxxxxx Xxxxx-Xxxxx, Dr. Xxxxx Xxxxxxxxxxxx, Dr. Xxxxxx XxXxxxx, Dr. Xxxxxx Xxxxxxxx

Page | 5

May 20, 2011

Keynote Speech II: Political Science Building, Room 103

9:00-9:45 Dr. Xxxxxxxxxx Petcharamesree 9:45-10:00 Coffee Break

Thamnatee Building, Room 2

CHAIR: Prof. Xxxxxx Xxxx Xxx

Rector, University of Economics and Business, Vietnam National University

10:00-10:25 Coping with capital inflows: Policy options for Laos

Xxxxxxxx Kyophilavongs, National University of Laos

10:25-10:40 Discussant: Vu Quoc Huy 10:40-11:00 Open discussion

11:00-11:25 Vietnam’s Exchange Rate and Monetary Policy

Xxxxxx Xxxx Xxxxx, and Xxxx xxx Xx,

University of Economics and Business and Ministry of Finance

11:25- 11:40 Discussant: Xxxxxxxxx Xxxxxxxxxxx

11:40-12:00 Open discussion

12:00-13:00 Lunch

CHAIR: Xxxxxx Xxxx Xxxxx, Vice Rector

University of Economics and Business, Vietnam National University

13:00-13:25 Fiscal stimulus in Viet Nam

Vu Quoc Huy, University of Economics and Business

13:25-13:40 Discussant: Xxxxxxxxx Xxxxxxxxxxx

13:40- 14:00 Open discussion

14:00-14:25 Effectiveness of Macroeconomic Policies in Cambodia

Chea Ravin and Ung Luyna

National Bank of Cambodia and Supreme Economic Council

14:25-14:40 Discussant: Xxxxxx Xxxx Xxxx

14:40-15:00 Open discussion

15:00-15:15 Coffee Break

CHAIR: Xxxxxx Xxxxxxxxxxxxx, Vice Dean, Faculty of Economics

15:15-15:40 Thailand’s fiscal policy for growth and price stability

Xxxxxxxxx Xxxxxxxxxxx, Thammasat University

15:40-15:45 Discussant: Xxxxxx Xxx

15:45-16:00 Open discussion

16:00-16:25 A synthesis of macroeconomic policy strategy of CLTV countries

Xxxxxxxxxx Xxxxxx, Thammasat School of Economics 16:25-16:40 Discussant: Xxxxxxxx Xxxxxxx

16:40-17:00 Open Discussion

Political Science Building: Room 103

17:00-18:00 Conclusion and Plenary Discussion: Dr. Xxxxxx Xxxxxxxxxxxxx

Notes:

Paper presentation: 25 minutes

Discussant: 15 minutes

Open discussion: 20 minutes

Page | 6

2.2 รายชื่อผเข้าร่วมประชุม วันพฤหสที่ 19 พฤษภาคม 2554

No.	Name	Organization
1	Ung Luyna	Division Head Pa Supreme National Economic Council (SNEC), Cambodia	ge \| 7
2	Siphat Lim	Economic Researcher, Economics Research and Statistics Department National Bank of Cambodia
3	Xxxxxxxx Kyophilavongs	Faculty of Economics, Lao National University
4	Professor Xxxxxx Xxxx Son	Rector, University of Economics and Business, Vietnam National University
5	Professor Xxxxxx Xxxx Xxxxx,	Vice Rector, University of Economics and Business, Vietnam National University
6	Xxxxxx Xxxx Hung	University of Economics and Business, Vietnam National University
7	Professor Xx Quoc Xxx	Xxxx, Faculty of Economics and Business University of Economics and Business, Vietnam National University
8	Piyada Jutaviriya	Thailand Research Fund
9	Xxxxxxxx Xxxxxxx,	Dean, Faculty of Commerce and Accounting, Thammasat University
10	Suluck Pattarathamas	Thammasat Business School, Thammasat University
11	Phongthorn Wrasai	Faculty of Economics, Thammasat University
12	Xxxxxxxxx Xxxxxxxxxxx	Xxxx, Faculty of Economics, Thammasat University
13	Xxxxxx Xxxxxxxxxxxxx	Faculty of Economics, Thammasat University
14	Euamporn Xxxxxxxxxxx	Faculty of Economics, Thammasat University
15	Xxxxx Xxxxxxxxxxx	Faculty of Economics, Thammasat University
16	Saipin Cintrakulchai	Vice Dean, Faculty of Economics, Thammasat University
17	Xxxxx Xxxxxxxxxxx	Research Assistant, Economic Research and Training Center
18	Rattanyu Dechjejaruwat	Research Assistant, Economic Research and Training Center
19	Dr. Xxxxxx Quoc Viet	UEB, Vietnam National University
20	Xx Xx Xxxxx	Researcher, Economic Research, UDI
21	Sawasd Tantaratana	Thailand Research Fund
22	Xxxxxx Xxx Apoldo	Ateneo de Davao

No.	Name	Organization
23	Xxxxxxxx Xxx Xxxxxxx	Ateneo de Davao University
24	Patra Jankong
25	P J Reas	University of Leeds
26	Christ	Chulalongkorn University Pa	ge \| 8
27	Xxxxxxxx Xxxxxxx	Faculty of Commerce and Accounting, Thammasat University
28	Patamavadee Susuki	Thailand Research Fund

รวมผู้เขาร่วมการประชุมวันพฤหัสบดีที่ 19 พฤษภาคมทั้งสิ้น 28 ท่าน

วันศุกร์ที่ 20 พฤษภาคม 2554

No.	Name	Organization
1	Ung Luyna	Division Head Supreme National Economic Council (SNEC), Cambodia
2	Siphat Lim	Economic Researcher, Economics Research and Statistics Department National Bank of Cambodia
3	Xxxxxxxx Kyophilavongs	Faculty of Economics, Lao National University
4	Professor Xxxxxx Xxxx Son	Rector, University of Economics and Business, Vietnam National University
5	Professor Xxxxxx Xxxx Xxxxx,	Vice Rector, University of Economics and Business, Vietnam National University
6	Xxxxxx Xxxx Hung	University of Economics and Business, Vietnam National University
7	Professor Xx Quoc Xxx	Xxxx, Faculty of Economics and Business University of Economics and Business, Vietnam National University
8	Dr. Xxxxxxxx Xxxxxxxxx	Dean, Faculty of Political Science, Thammasat University
9	Xxxxxxxx Xxxxxxx,	Dean, Faculty of Commerce and Accounting, Thammasat University
10	Phongthorn Wrasai	Faculty of Economics, Thammasat University
11	Xxxxxxxxx Xxxxxxxxxxx	Xxxx, Faculty of Economics, Thammasat University
12	Saipin Cintrakulchai	Vice Dean, Faculty of Economics, Thammasat University
13	Panit Wattanakoon	Research Assistant, Economic Research and Training Center

No.	Name	Organization
14	Rattanyu Dechjejaruwat	Research Assistant, Economic Research and Training Center
15	Xxxxxxxxx Srisethkul	Research Assistant, Economic Research and Training Center Pa
15	Xxxxxxxxx Srisethkul		ge \| 9
16	Dr. Xxxxxx Quoc Viet	UEB, Vietnam National University
17	Xxxxx Xxxxxxx	Freie Universitaet, Berlin, Germany
18	Xxxxx Xxxxxx	Mahidol University
19	Sok Sereg	Hong Kong Baptist University
20	Xx Xx Xxxxx	Researcher, Economic Research, UDI
21	Xxxxxxx Xxxxxxxx	Student, Thammasat University
22	Warat Choengpraphakorn	Student, Chulalongkorn University
23	Rapeeporn Sitthi	Thailand Research Fund
24	Thai Xxxxx	Panna Sastra University
25	Chour Vuthy	Royal University of Law and Economics
26	Wanicha Direkudomsak	Faculty of Economics, Thammasat University

รวมผู้เข้าร่วมการประชุมวันพฤหัสบดีที่ 20 พฤษภาคมทั้งสิ้น 26 ท่าน

3. เอกสารประกอบการประชุม และข้อคิดเห็นจากการประชุมแต่ละครั้ง

การประชุมครั้งนี้มีเอกสารประกอบการประชุมทงหมด 10 ชุด จัดทําโดยนักวิจัย และมีผู้วิจารณ์ ดังต่อไปน

xxxxxx	xxxxxxxx	xxxxxxxxxx

1. Toward the Next Decade of Thailand’s Fiscal Decentralization: Learning from the past	Pracha Khunnathamdee	Euamporn Xxxxxxxxxxx
2. Xxxxxxxxxxxxx and the effectiveness of monetary policy in Cambodia	Siphat Lim	Sicha Thubdimphan
3. Exchange rate and capital flows management in Vietnam	Xxxxxx Xxxx Xxx, Xxxxxx Xxxx Xxxx, and Xxxxxx Xxx Xx Xx	Xxxxxx Xxxxxxxxxxxxxx
4. Macroeconomic consequences of Thailand’s exchange rate policy	Xxxxxxxxx Xxxxxxxxxxx	Xxxxxx Xxxx Xxxxx
5. Coping with capital inflows: Policy options for Laos	Xxxxxxxx Kyophilavongs	Vu Quoc Huy
6. Vietnam’s Exchange Rate and Monetary Policy	Xxxxxx Xxxx Xxxxx, and Xxxx xxx Xx	Xxxxxxxxx Xxxxxxxxxxx
7. Fiscal stimulus in Viet Nam	Vu Quoc Xxx	Xxxxxxxxx Xxxxxxxxxxx
8. Effectiveness of Macroeconomic Policies in Cambodia	Xxxx Xxxxx and Xxx Xxxxx	Xxxxxx Xxxx Xxxx
9. Thailand’s fiscal policy for growth and price stability	Bhanupong Xxxxxxxxxxx	Xxxxxx Xxx
10. A synthesis of macroeconomic policy strategy of CLTV countries	Phongthorn Wrasai	Kulpatra Sirodom

Page | 10

ทั้งนี้ ได้แนบเอกสารประการประชุมดังกล่าวทั้งหมดมาในเอกสารแนบพร้อมกับตวรายงานการดําเนินงานนี้ แล้ว

ข้อคิดเห็นของบทความวิจัยแต่ละชนมีดังต่อไปนี้

*สําหรับบทความวิจัยxxxxxxx 1 และ 2 ไม่มีการบันทึกคําวิจารณ์ แต่มีการวิจารณ์เกิดขนจริงและนกวิจัยเจ้าของ บทความวิจัยได้นําคําแนะนําเหล่านั้นไปปรับปรุงพัฒนางานวิจัยเพื่อจัดทํารูปเล่มxxxxxxxต่อไป

บทความวิจัยxxxxxxx 3 Exchange rate and capital flows management in Vietnam by Xxxxxx Xxxx Xxx, Xxxxxx Xxxx Xxxx, and Xxxxxx Xxx Vu Ha University of Economics and Business, Vietnam National University

Comment by Dr. Xxxxxx Xxxxxxxxxxxxx, TBS

Figure 2.1 has no ODA data

For page 12 and 36, there are several graphs for NEER, please specify which ones will be used?

• NEER and REER from Nguten (2009), “Implication of Exchange rate policy for exchange rate market development: Vietnam, 1986-2008”

• Different structure in NEER and REER

• Vo (2009)

• Please provide clearly of how you calculate NEER and REER From page 19

• NEERVCB is positive

1. For REERVCB, does this formula use Price of the USA? If so, is PPP assumed? Please provide justification regarding this.

• Please clarify what type of Price index is used in this paper.

• Please explain that would a VND/USD rate be more appropriate than REER? As the xxxxxxxxxxx view that:

1. In Vietnam, people use dollar anyway when they trade with whomever.

2. if they move in the same trend, then it should be ok From page 20

• The hypothesis uses VND/USD but you are testing REER. So it should be only VND in the hypothesis, not VND/USD

Does this data, XXX, consist of inflows of a particular year or an outstanding at the end of the year?

• Due to cubic spine function to interpolate the data to quarterly. From page 21

• Almon lag polynomials, are there any tests for the optimal lag length and degree of polynomials?

• Could the lag of other variables also explain REER? Please provide justification. Endogeneity

Page | 11

• Endogeneity needs to be tested before performing the model.

Floor Discussion

Do you use data on Net FDI or FDI inflows? As different types of data lead to different result

When you argue that FDI would lead to higher export capacity to enhance balance of payment, please specify which industry in economy that FDI leads to such impact.

Is there a Twin deficit (Budget and current account deficit)? If so, how are you going to solve that?

Could you provide any data on tradable and nontradable goods?

บทความวิจัยxxxxxxx 4 Macroeconomic consequences of Thailand’s exchange rate policy by Xxxxxxxxx Xxxxxxxxxxx, Faculty of Economics, Thammasat University

Comment by Xxxxxx Xxxx Xxxxx

This is a good paper, in both qualitative and quantitative analyses. Please provide more explanation on

• inflation and exchange rate

• what happen on the movement of the exchange rate from monetary authority?

• in 2008 and 2009, more implication on Thai economy Please explain how REER is calculated

Please make a comparison between cases of Vietnam and Thailand using the research papers in this project

บทความวิจัยxxxxxxx 5 Coping with capital inflows: Policy options for Laos by Xxxxxxxx Kyophilavongs, National University of Laos

Comments by Vu Quoc Huy

The paper has clear research question and methodology

• Regarding the Testing of Dutch Disease hypothesis for Laos Economy, Does capital flows appreciate REER?

Do foreign capital flows increase manufacturing? Does stronger kip reduce manufacturing output?

• Regarding ARDL data from 1989 - 2008 Second best given the data availability

You need to show the long-run and short-run coefficients (speed of adjustment)

• Data mainly come from service sector (hydropower)

Page | 12

Floor Discussion

According to Table 8.3:

• Please provide more explanation on results on price level and exchange rate and Coefficient for speed of adjustment to see the pass through

• Please tell the story on the result of Dutch disease and your result

• Note that Dutch disease and resource curse are different Please add those diagram in presentation in your paper Data should be updated to the latest year

You may think of other frameworks to explain the policy

• i.e. the permanent income hypothesis on fiscal policy Inflation in Laos is coming from Capital Flow or Printing Money

บทความวิจัยxxxxxxx 6 Vietnam’s Exchange Rate and Monetary Policy by Xxxxxx Xxxx Xxxxx, and Xxxx xxx Xx, University of Economics and Business and Ministry of Finance

Comment by Dr.Xxxxxxxxx Xxxxxxxxxxx

The deposit rate is 20 percent, lending rate is 25 percent

• Are these numbers from non bank institution?

• Whether the government can use the ceiling as a monetary instrument?

• The ceiling remains there so it is possible that there is a problem on negative real interest rate. Please research more on this.

• Do people have inflation hedging?

You should tie the connection the monetary and exchange rate policies together Please put income elasticity in one table as it is easier when doing country comparison

Floor Discussion

How can you control market exchange rate in policy point of view? Please explain

How can you use credit growth to control exchange rate and inflation policies? Please explain more on this

Can credit growth policy be implemented to control exchange rate and price level?

Please explain how can devaluation reduce inflationary pressure?

บทความวิจัยxxxxxxx 7 The Effects of Government Spending on Output in Viet Nam by Vu Quoc

Huy, University of Economics and Busines

Page | 13

Comment by Xxxxxxxxx Xxxxxxxxxxx

Issues of Fiscal spending on REER and inflation

Viet Nam still has fiscal space, low budget deficit. Please research more on this

Can fiscal Policy stabilize the economy?

• Yes?, No?, Uncertain?

Does Viet Nam have the budget law to set the certain amount of loans from abroad, debt services, etc.?

Are there any signs of automatic fiscal stabilizer?

• e.g. direct tax and indirect tax?

Thailand had too much private debt in 1997 but for Viet Nam case, debt level in VND will be the burden of the government. So it would cause different impact.

Is there a high premium for foreign loans for budget finance? or ODA?

Floor Discussion

Regarding the effect of fiscal policy on inflation and GDP, does Inflation moves first? Please add and expand more on policy implication and conclusion

Some references are not cited in the article

บทความวิจัยxxxxxxx 8 Effectiveness of Macroeconomic Policies in Cambodia by Xxxx Xxxxx and Xxx Xxxxx, National Bank of Cambodia and Supreme Economic Council

Comment by Xxxxxx Xxxx Xxxx

The research topic is very interesting and relevant to the case of Vietnam also

Regarding the use of monetary policy to maintain low rate of inflation, fiscal is actually more effective. So you should emphasize and focus on this argument instead of providing so many of other information

For the model of gradual expenditure, please tell why you choose these variables and provide literature reviews to back up your selection. I think there are some other important variables to be included

About xxxxxxxxxxxxx, your paper says that CAM monetary policy is not effective. You should include degree of xxxxxxxxxxxxx into your model to see the degree

Your results are different from what Xxxxxx showed in his research paper. There exists inconsistency.

CPI is not very good proxy for inflation BUT you choose it to be a proxy in your model. You better not use CPI for this purpose.

Page | 14

Floor Discussion

In Cambodia, data on CPI are actually calculated from some cities in Cambodia not the

whole country. The CPI of the whole country is not available as most institutions in

Cambodia do not consider data record as an important issue. So Econometrics is not widely used in Cambodia as empirical data are not available. Cambodia banking system uses only Dollar option as an instrument.

You have talked a lot about government purchase and capital expenditure. My question is that how about the role of tax instruments in Cambodia? Will it be effective like government spending?

About open market operation, I think it’s not Open Market Operation (OMO). you might be using the wrong term because you haven’t have stock market yet so you can’t have OMO

บทความวิจัยxxxxxxx 9 Thailand’s fiscal policy for growth and price stability by Xxxxxxxxx Xxxxxxxxxxx, Thammasat University

Comment by Xxxxxx Xxx

The paper stated that Thailand has automatic stabilizer in revenue side, Please explain more on this point

As Thai baht keeps appreciating, will there be an impact on fiscal in both short and long run? Please research more on this.

Regarding experience of Thailand in 1997 crisis, how Thailand cope with that turbulence? Please explain more on this in your paper.

Page | 15

บทความวิจัยxxxxxxx 10 3.10 A synthesis of macroeconomic policy strategy of CLTV countries by Xxxxxxxxxx Xxxxxx, Thammasat School of Economics

Comment by Xxxxxxxx Xxxxxxx

Issues for regional cooperation and integration and options for the CLTV countries Floor Discussion

In general, we can stimulate output, export, import

Please explain more about contradiction of findings from different countries What happen in one economy might not happen in another e.g. price instability Should think whether or not inflation should be included in your model

Thailand and Vietnam, REER is appreciated but due to different reasons. After crisis so we get price stability. But in Vietnam, we have high inflation and it is faster than the devaluation of nominal exchange rate. So real appreciation of VND is a result of inflation NOT from productivity like in the case of Thailand

On fiscal side, Cambodia and Vietnam policies are effective. Given room of investment, Cambodia still need more infrastructure so we can expand more on that, unlike Thailand where things are already established. So fiscal effect are limited in those countries that have no room for investment improvement.

Negative relationship between REER and output might come from the xxxxxxxxxxxxx (wage in dollar)

Random effect model should also be tested

Page | 16

4. บทคัดย่อภาษาไทย และภาษาอังกฤษ

4.1 Toward the Next Decade of Thailand’s Fiscal Decentralization: Learning from the

past by Xxxxxx Xxxxxxxxxxxxx, Thammasat School of Economics

Page | 17

TOWARD A NEXT DECADE OF THAILAND DECENTRALIZATION: LEARNING FROM THE PAST

Pracha Koonnathamdee

ABSTRACT

Since the decade of 2000s, we have witnessed in the mixed results of Thailand decentralization. Reviewing the major changes and impacts are important to planners and policy makers in order to implement the "better" and "sustainable" decentralization policy and proper measures. This paper discusses a conceptual framework of Thailand decentralization based on public choices and principal-agent problem. Subsequently, this research brings in empirical analysis using stylized facts and policy gaps of current decentralization, and recommends a framework for next steps. Results in the last decade illustrated that Thailand decentralization process was not well completed, and intended functions to be transferred appear ongoing with difficulties. Recommendations for a next decade combine the recommendations for filling policy gaps in administrative and fiscal decentralization particular in the need for database and researches. Encouraging potential local governments in local government borrowing is required in order to increase local public good investment, reduce pressure in central government budgeting, and support local government responsibility and governance. Two issues needed more attention from relating governments are the Asian Economic Community (AEC) and the climate change problem. Finally, extending people understanding in the "real" decentralization still requires major drive from the central government and academics.

บทคัดย่อ

ประเทศไทยกําลังประสบกับผลหลากหลายรูปแบบจากการดําเนินนโยบายการxxxxxxอํานาจการxxxxxx อย่างชัดเจนในช่วง 10 ปีที่ผ่านมา รัฐบาลและนกวางนโยบายรัฐควรให้ความสําคัญและคํานึงถึงผลกระทบและ การเปลี่ยนแปลงดังกล่าวเพื่อให้xxxxxxปรับเปลี่ยนนโยบายการxxxxxxอํานาจและมาตรการxxxxxขึ้น ยั่งยืน มากขึ้น และเหมาะสมยิ่งขึ้น บทความวิจัยxxxxxxxศึกษาเกี่ยวกับกรอบแนวความคิดเรื่องนโยบายการxxxxxx อํานาจของรัฐบาลไทยตามทฤษฎีทางเลือกสาธารณะและทฤษฎีปัญหาตัวการ-ตัวแทน (หรือปัญหาอันเกิดจาก จุดมุ่งหมายในการทํางานที่ต่างกันระหว่างนายจ้างและลูกจ้าง) จากนั้นจะทําการวิเคราะห์ข้อมูลจริงโดยใช้ stylized facts และช่องว่างนโยบายการxxxxxxอํานาจ และเสนอข้อแนะนํากรอบโครงสร้างในขั้นต่อไป ผลการวิจัยข้อมูลในช่วงxxxxxxล่าสุดนี้พบว่า กระบวนการการxxxxxxอํานาจไม่สําเร็จครบถ้วนตาม กระบวนการและการโยกย้ายอํานาจการxxxxxxเกิดขึ้นโดยมีอุปสรรคมากมาย สําหรับคําแนะนําต่อนโยบาย ใน 10 ปีข้างหน้านี้ รัฐบาลควรดําเนินนโยบายที่ช่วยxxxxxxxxช่องว่างนโยบายที่เกิดขึ้นในด้านการxxxxxx และ ดําเนินนโยบายการxxxxxxอํานาจต่อไปโดยเฉพาะในส่วนของการพัฒนาฐานขอมูลและงานวิจัย รัฐจําเป็นต้อง xxxxxศักยภาพของหน่วยxxxxxxxxxxxxxxxxxxxxด้วยการสนับสนุนการกู้ยืมของรัฐบาลระดับxxxxxxxxเพื่อ xxxxxxxxการลงทุนในสินค้าสาธารณะในxxxxxxxx ลดแรงกดดันต่อการจัดสรรงบประมาณxxxxxxxx และเพื่อ สนับสนุนการxxxxxxและการทําหน้าที่ของการxxxxxxส่วนท้องถิ่น นอกจากนี้รัฐบาลควรให้ความสนใจมาก ขึ้นในเรื่องของประชาคมเศรษฐกิจอาเซียน (ASEAN Economic Community) และเรื่องปัญหาการ เปลี่ยนแปลงสภาพภูมิอากาศ (Climate Change) สุท้ายนี้รัฐบาลxxxxxxxxและนักวิชาการยังxxเป็นกําลัง สําคัญที่จะขับเคลื่อนให้ประชาชนเข้าใจความหมายของการxxxxxxอํานาจที่แท้จริงอย่างถูกต้องอย่าง กว้างขวาง

Page | 18

4.2 Xxxxxxxxxxxxx and the effectiveness of monetary policy in Cambodia by Xxxxxx Xxx, National Bank of Cambodia

Xxxxxxxxxxxxx and the Effectiveness of Monetary Policy in Cambodia

Xxxxxx Xxx* National Bank of Cambodia

Abstract

The level of xxxxxxxxxxxxx in Cambodia is very high, but it remains stable bounded in the range between 94 and 95 percent from 1995 to 2010, as measured by DR4. However, the Granger-causality test between xxxxxxxxxxxxx and inflation revealed that both variables do not explain each other. Then, inflation is not the problem of xxxxxxxxxxxxx in the last economic stage of Cambodia. Moreover, the cash USD circulation outside banks as measured by Xxxxxx filter was large, 2.1 billion USD in 1995 and has increased to 13.64 billion USD in 2010. Therefore, increased public confident toward banking system would help reduce cash USD in circulation. Moreover, highly degree of xxxxxxxxxxxxx with macroeconomic complexity in Cambodia has put a lot pressure on monetary authority in implementing monetary policy since exchange rate stability is believed to achieve price stability. The impact of exchange rate change on price level exhibits cyclical pattern while money supply growth has a positive shock on price level. Indeed, the impact of money supply growth on exchange rate also exhibits cyclical pattern as indicated by SVAR. Thus, exchange rate stability is not clearly lead to price stability, but changing in money supply would significantly affect price.

Page | 19

บทคัดย่อ

ประเทศกัมพูชามีการใช้เงินดอลลาร์xxxxxแทนเงินตราประเทศตัวเอง หรือที่เรียกว่า Xxxxxxxxxxxxx

ในระดับที่สูงมาก แต่เมื่อวัดโดย DR ระดับดังกล่าวนี้อยู่ในระดับxxxxxxxxxระหว่าง 94 ถึง 95 เปอร์เซ็นต์ในช่วง ปี พ.ศ. 2538 – 2553 อย่างไรก็ตามการทดสอบ Granger-causality ระหว่าง xxxxxxxxxxxxx กับ เงินเฟ้อ พบว่าตัวแปรทั้งสองนี้xxxxxxเป็นสาเหตุของกันและกัน ดังนั้นเงินเฟ้อจึงxxxxxxเกิดจากผลของการใช้เงินดอลลาร์ xxxxxแทนเงินเรียลของคนเวียดนามในช่วงหลัง นอกจากนี้กระแสเงินสดดอลลาร์ภายนอกธนาคารนั้นมี ปริมาณมหาศาลถึง 2.1 พันล้านดอลลาร์xxxxxใน พ.ศ. 2538 (วัดโดย Kalman) และxxxxxขึ้นไป 13.64 พันล้านดอลลาร์สหรฐใน พ.ศ. 2553 ดังนนความเชอมั่นต่อภาคการเงินการธนาคารทxxxxxขึ้นจะช่วยลดปริมาณ xxxxxxxxxดอลลาร์xxxxxในกัมพูชา นอกจากนี้ความxxxxxxxของเศรษฐกิจระดับมหภาคของกัมพูชาประกอบ กับระดับการใช้เงินดอลลาร์xxxxxแทนเงินตราประเทศในระดับสูงxxxxxแรงกดดันต่อนักนโยบายการเงินในการ ดําเนินนโยบายการเงินเพราะทุกคนเชื่อว่าอัตราแลกเปลี่ยนที่มีเสถียรภาพจะก่อให้เกิดเสถียรภาพของราคาใน กัมพูชา ผลกระทบจากการเปลี่ยนแปลงอัตราแลกเปลี่ยนต่อระดับราคามีลักษณะเป็นแบบแผนxxxxxxx (cyclical pattern) ในขณะที่อัตราการเติบโตของปริมาณเงินในระบบก่อให้xxxxxxกระทบทางบวกต่อระดับ ราคา โดยความจริงแล้ว SVAR ก็ระบุว่าผลจากการเติบโตของปริมาณเงินในระบบต่ออัตราแลกเปลี่ยนมี ลักษณะเป็นแบบแผนxxxxxxx ดงนั้นอัตราแลกเปลี่ยนที่มีเสถยรภาพxxxxxxนําไปสู่ระดับราคาที่มีเสถียรภาพอย่าง ชัดเจน แต่การเปลี่ยนแปลงปริมาณเงินสดในระบบนนส่งผลต่อระดับราคาอย่างมีนัยสําคัญ

Page | 20

4.3 Exchange rate and Capital flows management in Vietnam by Xxxxxx Xxxx Xxx, Xxxxxx Xxxx Xxxx, and Xxxxxx Xxx Vu Ha, University of Economics and Business, Vietnam National University

Page | 21

EXCHANGE RATE AND CAPITAL INFLOW IN VIETNAM

Research project funded by the Thailand Research Fund

Research team: Xxxxxx Xxxx Xxx, Xxxxxx Xxxx Xxxx, Xxxxxx Xxx Xx Xx

Draft Report as of May 2011

Executive summary

1. Capital flow is a powerful phenomenon in the current context of Vietnam. Although theories and empirical evidences in the world already noticed the impact of capital inflows on exchange rate movement, such impact has not been adequately examined in Vietnam. Vietnam’s policies of capital control have been experimented for long time and continued in the post-WTO accession. The failure to alter inappropriate capital control policies may undermine price stability, slow down foreign trade, and result in the fall of the GDP. Vietnam’s macroeconomic instability in 2008 provided a clear evidence.

2. Considering real effective exchange rate a crucial indicator that measures the health of the Vietnamese economy, this paper answers two questions: i) How has capital inflow impacted the movement of real effective exchange rate? and ii) What are the effective measures to cushion the effects of capital inflows on exchange rate?

3. Although targeting at nominal exchange rate policy has been so far an effective tool to intervene into the foreign exchange market, it may not solve all problems in the long run. Current policy to stabilize the foreign exchange market tended to move toward freer exchange rate mechanism and unavoidable depreciation of VND. Letting VND depreciate may help Vietnam boost up its export and reduce trade deficit. However, the depreciation of VND may have negative impact on other exporting economies, especially Vietnam’s neighbors.

4. The lessons from Vietnam provide important policy implications for Lao PDR and Cambodia as the low-income countries in the Greater Mekong Sub-region and policy

implication for the role of Thailand in sub-regional economic cooperation for the purpose of sustained economic growth.

บทคัดย่อ

1. การไหลเข้า-ออกของxxxxxxxxxทุนถือเป็นxxxxxxxxxxxxxทรงพลังในสถานการณ์ปัจจุบันของ เวียดนาม แม้ว่าทฤษฎีและเหตุการณ์จริงที่เกิดขึ้นมากมายxxxxxxxxxถึงxxxxxxxxกระทบจากการไหล เข้าของเงินทุนต่ออัตราแลกเปลี่ยนที่เปลี่ยนแปลงไป ผลกระทบตามทฤษฎีและกรณีของประเทศอื่นๆ ไม่xxxxxxใช้อธิบายผลที่เกิดขึ้นในเวียดนามxxxxxเพียงพอ เวียดนามได้ทดลองใช้นโยบายควบคุม เงินทุน (Capital Control) มาเป็นเวลานานและยังxxดําเนินนโยบายดงกล่าวหลังเวียดนามเข้าร่วม เป็นสมาชิกองค์การการคาโลก การใช้นโยบายควบคุมเงินทุนxxxxxxเหมาะสมอาจทําลายเสถียรภาพของ ระดับราคาภายในประเทศ ทําให้การค้ากับต่างประเทศชะลอตัวลง และทําให้ผลผลิตมวลรวมใน ประเทศลดลง ดงxxxxเหตุการณ์ที่เกิดขึ้นในเวียดนามในปี พ.ศ. 2551

2. เมื่อพิจารณาอัตราแลกเปลี่ยนที่มีประสิทธิภาพที่แท้จริง (REER) เป็นตัวบ่งxxxxxxสําคัญในการวัดสุขภาพ ของเศรษฐกิจเวียดนาม บทความวิจัยนี้xxxxxxตอบคําถาม 2 ข้อ ดังนี้ 1) การไหลข้าวของเงินทุนส่ง ผลกระทบต่อการเปลี่ยนแปลงของอัตราแลกเปลี่ยนที่มีประสิทธิภาพที่แท้จริง (REER)อย่างไร 2) มาตรการที่มีประสิทธิภาพในการxxxxxxผลกระทบของอัตราแลกเปลี่ยนจากการไหลเข้าของเงินทุนมี อะไรบ้าง

3. แม้ว่านโยบายการกําหนดค่าอตราแลกเปลยนตัวเงินจะเป็นxxxxxมือที่มีประสิทธภิ าพในการแทรกแซง ตลาดอัตราแลกเปลี่ยนเงินตรา นโยบายดังกล่าวอาจไม่xxxxxxแก้ไขปัญหาทุกอย่างได้ในระยะยาว นโยบายที่รัฐบาลเวียดนามใช้อยู่ในปัจจุบันเพื่อสร้างเสถียรภาพในตลาดแลกเปลี่ยนเงินตรามีxxxxxxx xxxจะมุ่งสู่กลไกตลาดที่xxxxมากขึ้นและนั่นหมายxxxxxxที่เงินดองจะอ่อนค่าลงอย่างหลีกเลี่ยงxxxxxx การ ปล่อยให้เดินดองอ่อนค่าลงจะกระตุ้นการส่งออกและลดการขาดดุลการค้าของเวียดนาม อย่างไรก็ ตามการอ่อนตัวของเงินดxxxxxส่งผลลบต่อประเทศส่งออกอื่นๆโดยเฉพาะประเทศเพื่อนบ้านของ เวียดนาม

4. บทเรียนของเวียดนามจะเป็นประโยชน์ในแง่การดําเนินนโยบายเศรษฐกิจ ต่อประเทศลาวและกัมพูชา เนื่องจากประเทศเหล่านี้อยู่ในกลุ่มประเทศรายได้ต่ําในxxxxxxxลุ่มแม่น้ําโขง และเป็นประโยชน์ต่อ บทบาทของประเทศไทยสู่เป้าหมายการเจริญเติบโตทางเศรษฐกิจอย่างยั่งยืน

Page | 22

4.4 Macroeconomic consequences of Thailand’s exchange rate policy by Xxxxxxxxx Xxxxxxxxxxx, Faculty of Economics, Thammasat University

Macroeconomic Consequences of Thailand’s Exchange Rate Policy

Xxxxxxxxx Xxxxxxxxxxx*

Faculty of Economics, Thammasat University

This paper examines Thailand’s exchange rate policy and their implication on the effectiveness of macroeconomic policies over the past decades. It provides critical review on Thailand’s exchange rate policy and draws important lessons from Thailand’s mistakes on the choice of the exchange rate systems. Thailand’s exports are fundamentally determined more by world income than the exchange rate. Any attempt to create undervaluation would be counterproductive and costly.

บทคัดย่อ

บทความวิจัยนี้จะทําการตรวจสอบนโยบายอัตราแลกเปลี่ยนของประเทศไทยและผลของนโยบายต่อ ประสิทธิภาพของนโยบายมหภาคในช่วงสิบปีที่ผ่านมา มีการอภิปรายเชิงวิจารณ์นโยบายอัตราแลกเปลี่ยนของ ไทย และชี้ถึงบทเรียนสําคัญของประเทศไทยจากการเลือกใช้ระบบอัตราแลกเปลี่ยนที่ผิดพลาด การส่งออก ของไทยโดยพื้นฐานแล้วขึ้นอยู่กับระดับรายได้ของประชากรโลกมากกว่าตัวเลขอัตราแลกเปลี่ยน ดังนั้นความ xxxxxxใดๆที่จะลดค่าเงินบาทนั้นจึงxxxxxxเป็นนโยบายxxxxxxสร้างสรรค์และฟุ่มเฟือย

Page | 23

4.5 Coping with capital inflows: Policy options for Laos by Xxxxxxxx Kyophilavongs, National University of Laos

Cope with Capital Inflows in Laos: Policy Option for Escaping from Dutch Disease Xxxxxxxx KYOPHILAVONG

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Abstract

Foreign capital inflows are important sources of investment finance for low income developing countries like Laos. On the other hand, massive foreign capital inflows also may have adverse economic effects. This syndrome is called ‘Dutch Disease’. It refers to the phenomena that, firstly, capital inflows give rise to appreciation of the real exchange rate which causes adverse effects for traded goods production and employment. Despite the positive and negative impact of the foreign capital inflows on the Lao economy, there are very few studies on this issue. Therefore, this paper attempts to investigate the effects of foreign capital inflows on Lao economy using ARDL method. There are no long run relationship between capital inflow and real exchange rate but there are long run relationship between real exchange rate and manufacturing output. It means that recent appreciation of real exchange rate might cause declining of manufacturing output. Therefore, It is quite clear that Laos might have Dutch Disease syndrome. Appropriate macroeconomic management, effective short-term capital and other policy is needed to mitigate effect of Dutch Disease.

บทคัดย่อ

การไหลเข้าของเงินทุนต่างประเทศถือเป็นแหล่งเงินลงทุนที่สําคัญสําหรับประเทศกําลังพัฒนาที่มีรายได้ต่ํา xxxx ประเทศลาว แต่ในทางกลับกันการไหลข้าวของเงินทุนจํานวนมหาศาลอาจก่อให้xxxxxxร้ายต่อเศรษฐกิจ ของประเทศลาว ปรากฏการณ์ดังกล่าวเรียกว่า Dutch Disease ซึ่งเกิดขึ้นเมื่อการไหลข้าวของเงินทุน ก่อให้xxxxxxxแข็งค่าของอัตราแลกเปลี่ยนที่แท้จริงซึ่งก่อให้xxxxxxร้ายต่อการxxxxงานและxxxxxxผลิตสินค้าที่ มีการซื้อขายระหว่างประเทศ แม้ว่าการไหลเข้าของเงินทุนต่างประเทศสู่ประเทศลาวจะก่อให้เกิดxxxxxxxxxดี และผลเสีย ปัจจุบันยังไม่บทวิจัยที่ศึกษาเกี่ยวกับเรื่องxxxxxxxมาก ดังนั้นบทความxxxxxxxจะมุ่งไปที่การตรวจสอบ ผลกระทบจากการไหลข้าวของเงินทุนสู่ประเทศลาวโดยใช้วิธี ARDL method พบว่าการไหลข้าวของเงินทุน ไม่มีความxxxxxxxxในระยะยาวกับอัตราแลกเปลี่ยนที่แท้จริง แต่อัตราแลกเปลี่ยนที่แท้จริงมีความxxxxxxxxระยะ ยาวกับผลผลิตอุตสาหกรรม นั่นหมายxxxxxxที่ค่าเงินแข็งตัวอยู่ในปัจจุบันอาจก่อให้xxxxxxxลดลงของผลผลิต

อุตสาหกรรม ดังนั้นจะเห็นได้ว่าประเทศลาวอาจกําลังxxxxxกับ Dutch Disease เพื่อxxxxxxผลกระทบจาก Dutch Disease ประเทศลาวจําเป็นต้องมีการบริหารจัดการนโยบายระดับมหภาค จัดการเงินทุนระยะสั้น และจัดการนโยบายอื่นๆที่สําคัญ

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4.6 Vietnam’s Exchange Rate and Monetary Policy by Xxxxxx Xxxx Xxxxx, and Xxxx xxx Xx, University of Economics and Business and Ministry of Finance

ABSTRACT

EXCHANGE RATE AND MONETARY POLICY IN VIETNAM

By Dr. Xxxxxx Xxxx Xxxxx Dr. Xxxx Xxx Xx

Vietnam has launched the comprehensive economic reform since 1986 and she has gained remarked achievements such as a high economic growth, changes in economic structure, attracting more FDI and increasing the foreign trade, poverty alleviation, etc and these were praised by international communities during the last period. Since 2006 Vietnam has became a member of WTO that created the opportunities to increase trade and investment flows and also increasing external shocks require a new skills and approach to macroeconomic management, especially in the context of global financial crisis, it is necessary to understanding monetary policy, exchange rate policy, and their links.

This study will evaluate the effectiveness and limitations of monetary policy and exchange rate policies in maintaining high growth and price stability since 1991 up to now, particularly analyze the effects of exchange rate policy on stimulating exports and restraining imports; links between money supply, inflation and exchange rate, as well as relationship between Money supply (M2) and output (GDP), and relationship between inflation and unemployment? And then to draw policy lessons to Vietnam and experiences to Cambodia, Lao and Thailand.

After reviewing the main achievements and shortcomings of exchange rate and monetary policies in Vietnam since 1991 up to now, this study used econometric models to analyze above questions and the main findings of this paper including three issues: First, by using Error Correction Model (ECM) for World export demand functions and Import demand functions for Vietnam this study pointed out that the exchange rate had larger effects on Vietnamese exports and imports than export prices in the long run, and devaluation could be a measure to stimulate exports and restrain imports. Second, analyzing the interaction between inflation, exchange rate and the money supply, the results form three variable vector error correction models show that the money supply seems to have big short run impact to price level and the exchange rate. Third, the results from OLS regression denoted that the accommodative role of the monetary policy in Vietnam. The M2 movements should be closely followed (or be accommodative with) the growth rate of the economy and by Phillips curve estimation, reducing unemployment by 1% the trade off in inflation rate may be as high as 5.46%.

In brief, exchange rate and monetary policies conducting by the SBV since 1991 up to now was successful and contributed to maintaining macroeconomic stability and achieving economic growth. The evolution of monetary policy has been significantly through choosing targets, using the right monetary instruments that were more rely on indirect instruments, managing flexible exchange rate policy, coordinating with other policies and finally all ultimate targets of monetary policy have been mainly achieved. In the coming years, the monetary authorities should be concentrate on the independence of the SBV, to aware of the importance role of the Forecast in the financial sector and developing a forecast system a soon as possible, monetary policy should be conducted consistently, precisely and regulated smoothly to the shake of the financial sector and the economy, etc.

บทคัดย่อ

ประเทศเวียดนามมีการxxxxxxเศรษฐกิจเบ็ดเสร็จตั้งแต่ปี พ.ศ. 2529 มีมากมายที่ประสบความสําเร็จ เช่น อัตราการเจริญเติบโตของเศรษฐกิจอย่างรวดเร็ว การเปลี่ยนแปลงโครงสร้างเศรษฐกิจ ดึงดูดเม็ดเงินลงทุน โดยตรงจากต่างประเทศได้เพิ่มขึ้น มูลค่าการค้ากับต่างประเทศเพิ่มสูงขึ้น ความยากจนลดลง และได้รับคําชื่น ชมจาก international communities อีกด้วย ตั้งแต่ปี พ.ศ. 2549 เวียดนามเข้าร่วมเป็นสมาชิกองค์การ การค้าโลก ซึ่งทําให้เวียดนามสามารถทําการค้าได้มากขึ้น มีเม็ดเงินลงทุนเข้าสู่ประเทศมากขึ้น และทําให้ เวียดนามได้รับผลกระทบจากปัจจัยภายนอกเพิ่มมากขึ้น การที่เวียดนามเปราะบางต่อปัจจัยภายนอกมาก ยิ่งขึ้นทําให้เวียดนามจําเป็นต้องมีทักษะและวิธีการใหม่ที่จะรับมือกบปัจจัยภายนอกโดยเฉพาะเหตุการณ์วิกฤต

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เศรษฐกิจโลก เวียดนามจําเป็นตองมีความเข้าใจนโยบายการเงิน นโยบายอัตราแลกเปลยน และความเชื่อมโยง ระหว่างนโยบายการเงินกับอัตราแลกเปลี่ยนเป็นอย่างดี

บทความวิจัยนี้จะทําการประเมินประสิทธิภาพและข้อจํากัดของนโยบายการเงินและนโยบายอัตรา แลกเปลี่ยนซึ่งเวียดนามใช้ในการรักษาอัตราการเจริญเติบโตที่รวดเร็วและรักษาเสถียรภาพทางราคา ตั้งแต่ปี พ.ศ. 2534 จนถึงปัจจุบัน โดยเฉพาะการวิเคราะห์ผลของนโยบายอัตราแลกเปลี่ยนต่อการกระตุ้นการส่งออก และยับยั้งการนําเข้า การวิเคราะห์ความเชื่อมโยงระหว่างปริมาณเงินในระบบ เงินเฟ้อ และอัตราแลกเปลี่ยน การวิเคราะห์ความสัมพันธ์ระหว่างปริมาณเงินในระบบ (M2) และผลผลิตมวลรวมภายในประเทศ และการ วิเคราะห์ความสัมพันธ์ระหว่างเงินเฟ้อกับการว่างงาน จากนั้นจะกล่าวถึงบทเรียนด้านนโยบายเศรษฐกิจของ เวียดนาม และประสบการณ์ของกัมพูชา ลาว และไทย

หลังจากนั้น บทความนี้จะทบทวนความสําเร็จและความล้มเหลวของนโยบายอัตราแลกเปลี่ยนและ นโยบายการเงินของเวียดนามตั้งแต่ปี พ.ศ. 2534 จนถึงปัจจุบัน บทวิจัยนี้จะใช้แบบจําลองทางเศรษฐมิติเพื่อ วิเคราะห์ความสัมพันธ์ต่างๆที่กล่าวมาและเพื่อคนหาคาตอบของประเด็นที่สําคัญ 3 ประเด็น คือ 1) โดยการใช้ แบบจําลอง Error Correction (ECM) สําหรบฟังก์ชันอุปสงค์การส่งออกโลก กับฟังก์ชนอุปสงค์การนําเข้าของ เวียดนาม พบว่า ในระยะยาวอัตราแลกเปลี่ยนมีผลกระทบต่อการส่งออกและนําเข้าของเวียดนามมากกว่า ราคาสินค้าส่งออก และการลดค่าเงินอาจเป็นมาตรการที่ใช้ในการกระตุ้นการส่งออกของเวียดนามและยับยั้ง การนําเข้า 2) การวิเคราะห์ปฏิสัมพันธ์ระหว่างเงินเฟ้อ อัตราแลกเปลี่ยน และปริมาณเงินในระบบ พบว่าผล จากแบบจําลอง error correction 3 ตัวแปรแสดงให้เห็นว่า ในระยะสั้นปริมาณเงินในระบบมีผลกระทบอย่าง มากต่อระดับราคาและอัตราแลกเปลี่ยน 3) ผลจาก OLS regression แสดงออกถึงหน้าที่รองรับของนโยบาย การเงินของเวียดนาม การเปลี่ยนแปลงของปริมาณเงินในระบบ (M2) ควรจะตามมาด้วยอัตราการเติบโตของ เศรษฐกิจและค่าประมาณของ Phillips curve การลดลงของการว่างงาน 1 เปอร์เซ็นต์ ซึ่งก่อให้เกิดการ สูญเสียคือเงินเฟ้อที่อาจเพิ่มสูงถึง 5.46 เปอร์เซ็นต์เป็นการแลกเปลี่ยน

โดยสรุป อัตราแลกเปลี่ยนและนโยบายการเงินตั้งแต่ผี พ.ศ. 2534 จนถึงปัจจุบันนั้นประสบ ความสําเร็จและเป็นตัวก่อให้เกิดเสถียรภาพของเศรษฐกิจระดับมหภาคและอัตราการเติบโตของเศรษฐกิจที่สูง ของเวียดนาม เกิดวิวฒนาการที่สําคัญของนโยบายการเงินผ่านการเลือกเป้าหมาย การใช้เครื่องมือทางการเงิน ที่ถูกต้อง การประสานงานกับนโยบายอื่นๆ และการบรรลุเป้าหมายที่ตั้งไว้โดยส่วนใหญ่ ในอนาคตอันใกล้นี้ ผู้ ดําเนินนโยบายการเงินควรมุ่งเน้นในเรื่องของความเป็นอิสระของธนาคารกลางเวียดนาม ควรตระหนักถึง บทบาทที่สําคัญของหน่วยคาดการณ์เศรษฐกิจในภาคการเงิน และพัฒนาระบบคาดการณ์ในเร็ววัน ควรใช้ นโยบายทางการเงินอย่างสม่ําเสมอ กระชับ และวางระเบียบนโยบายต่อระบบการเงินและระบบเศรษฐกิจที่ เปลี่ยนแปลงตลอดเวลาอย่างราบรื่น

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4.7 Fiscal stimulus in Viet Nam by Vu Quoc Huy, University of Economics and Business

Abstract

This paper represents an attempt to make a quantitative assessment of the effects of the government spending in Viet Nam using a structural vector autoregressive regression (SVAR) model. It shows in particular that the government spending has a rather limited and quickly fading effect on the industrial output. Moreover, the government spending has distinguished effects on state-owned and the private sector. While the former’s response is far more positive and long-lasting to positive government spending, the latter’s is very limited and negative. It also shows that government spending composition matters as long as its effects on output and price concerned. The results provide evidence on possible crowding out and different patterns of effects by different components of the government spending. While these results need careful interpretation, the model nevertheless has shown that it could be a good tool to be used for assessing the effects of fiscal policy.

บทคัดย่อ

บทความวิจัยนี้เป็นผลของความพยายามที่จะใช้แบบจําลอง structural vector autoregressive regression (SVAR) model เพื่อประเมินผลต่อเศรษฐกิจจากการใช้จ่ายของรัฐบาลเวียดนาม พบว่าการใช้ จ่ายของรัฐบาลนั้นมีผลต่อภาคอุตสาหกรรมการผลิตในระยะเวลาที่สั้นมากและมีผลจํากัด นอกจากนี้การใช้ จ่ายของรัฐบาลก่อให้เกิดผลกระทบที่แตกต่างต่อภาคเอกชนและต่อภาครัฐวิสาหกิจ ในอดีตการตอบสนองของ ภาคเอกชนและวิสาหกิจต่อการใช้จ่ายของรัฐบาลเป็นบวกและมีผลนาน อย่างไรก็ตาม ปัจจุบันการตอบสนอง เป็นลบและมีผลในระยะเวลาอันสั้น นอกจากนี้ยังพบว่าการใช้จ่ายของรัฐบาลจะมีผลก็ต่อเมื่อมีการคํานึงถึงผล ของการใช้จ่ายของรัฐต่อผลิตผลและราคา ผลจากการคํานวณพบหลักฐานเกี่ยวกับ crowding out ที่เป็นไป ได้และแบบแผนของผลกระทบที่แตกต่างกันจากองค์ประกอบต่างๆของการใช้จ่ายของรัฐ แม้ว่าบทวิจัยนี้จะ พยายามแปลความจากผลจากแบบจําลองอย่างระมัดระวัง แบบจําลองนี้แสดงให้เห็นว่าสามารถเป็นเครื่องมือ ที่ดีในการประเมินผลของนโยบายการคลัง

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4.8 Effectiveness of Macroeconomic Policies in Cambodia by Chea Ravin and Ung Luyna, National Bank of Cambodia and Supreme Economic Council

“The Effectiveness of Macroeconomic Policies in Cambodia: An Empirical Investigation”

Chea Ravin & Ung Luyna

ABSTRACT

The remarkable achievements of stable macroeconomic environment in Cambodia for last decade have inspired a lot of debates over the role of the macroeconomic policies implemented. To verify this up, the study examines the influential of fiscal and monetary policies in Cambodia by a battery of time series econometrics approaches. More specifically, the study looks at the impact of policy shock on economic growth and inflation. The empirical results suggest that fiscal policy is more influential than monetary policy in stimulating the country economic growth in medium term and stabilizing prices. Interestingly, inflation does not virtually respond to monetary policy shock. On the other hand, the real effective exchange rate affirmatively reacts to fiscal and monetary shocks though the effects of government spending take longer than broad money. These empirical observations highlight policy markers the appropriate tools which could be employed to achieve macroeconomic objectives and cope with external shocks.

บทคัดย่อ

ความสําเร็จของกัมพูชาในทศวรรษที่ผ่านมาในการรักษาเสถียรภาพของเศรษฐกิจระดับมหภาคได้ ก่อให้เกิดการถกถึยงกันอย่างกว้างขวางถึงบทบาทของนโยบายเศรษฐกิจมหภาคที่ถูกใช้ เพื่อตรวจสอบการ อภิปรายดังกล่าว บทความวิจัยชิ้นนี้จะทําการตรวจสอบอิทธิพลของนโยบายการคลังและนโยบายการเงินใน กัมพูชาด้วยการใช้วิธีเศรษฐมิติแบบ time series บทความนี้จะลงลึกถึงผลกระทบของการคาดไม่ถึงของ ประชาชนต่อนโยบาย (policy shock) ต่อการเจริญเติบโตทางเศรษฐกิจและเงินเฟ้อ ผลจากข้อมูลจริงพบว่า นโยบายการคลังมีประสิทธิภาพมากกว่านโยบานการเงินในการกระตุ้นการเจริญเติบโตของเศรษฐกิจในระยะ กลางและในการรักษาเสถียรภาพของราคา เป็นที่น่าสนใจว่าเงินเฟ้อนั้นไม่ได้ตอบสนองกับการคาดไม่ถึงของ ประชาชนต่อการเปลี่ยนแปลงนโยบายการเงิน ในทางตรงกันข้ามพบว่าอัตราแลกเปลี่ยนที่มีประสิทธิภาพที่ แท้จริง (REER) ตอบสนองต่อการคาดไม่ถึงของประชาชนต่อการเปลี่ยนแปลงนโยบายการคลังและนโยบาย

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การเงินแม้ว่าผลจากการใช้จ่ายของรัฐจะใช้เวลานานกว่าปริมาณเงินตามความหมายกว้าง การสังเกตการณ์ จากเหตุการณ์จริงดังกล่าวแสดงให้นักนโยบายเห็นถึงเครื่องมือที่เหมาะสมสําหรับการไปถึงเป้าหมายเศรษฐกิจ ระดับมหภาคและสําหรับการรับมือกับปัจจัยภายนอก

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4.9 Thailand’s fiscal policy for growth and price stability by Bhanupong Nidhiprabha, Thammasat University

Fiscal policy for growth and stability: Lessons from Thailand

Bhanupong Nidhiprabha Thammasat University ABSTRACT

Fiscal policy can be employed to promote growth and stability. To stimulate growth in the aftermath of the global recession, sufficient fiscal space is needed to carry out effective stimulus package. Fiscal burden must be considered in addition to the impact of fiscal stimulus on price stability. The role of tax automatic stabilizer and the ability to cut current spending to balance the budget must be seriously taken into account when formulating fiscal stimuli. Although expansionary fiscal policy can be utilized during recession, it would be more effective when implementing the stimulus under the condition that the government can maintain public confidence. The rules of fiscal sustainability must be strictly observed all the time to ensure price stability and long-term growth.

บทคัดย่อ

นโยบายการคลังสามารถนําไปใช้เพื่อส่งเสริมการเติบโตและเสถียรภาพของเศรษฐกิจ เพื่อกระตุ้นการ เจริญเติบโตของเศรษฐกิจภายหลังวิกฤตเศรษฐกิจโลกนั้นจําเป็นต้องมีที่ว่างสําหรับนโยบายการคลัง เพื่อ สามารถสร้างชุดนโยบายการกระตุ้นเศรษฐกิจที่มีประสิทธิภาพได้ รัฐต้องคํานึงถึงภาระทางการคลังที่มาพร้อม กับผลของราคาที่มีเสถียรภาพอันเนื่องมาจากการใช้นโยบายการคลัง เมื่อมีการออกนโยบายการคลังเพื่อ กระตุ้นเศรษฐกิจ รัฐต้องคํานึงถึงบทบาทของระบบภาษีในการเป็นตัวปรับเสถียรภาพอัตโนมัติและ ความสามารถตัดการใช้จ่ายงบประมาณเพื่อสร้างสมดุลของงบประมาณรวมเข้าไปด้วย แม้ว่านโยบายการคลัง กระตุ้นเศรษฐกิจจะเป็นประโยชน์ในช่วงเศรษฐกิจซบเซา นโยบายดังกล่าวจะมีประสิทธิภาพมากขึ้นเมื่อ สามารถนําไปใช้ในขณะที่รัฐบาลสามารถรักษาความเชื่อมั่น

4.10 A synthesis of macroeconomic policy strategy of CLTV countries by Phongthorn Wrasai, Thammasat School of Economics

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Macroeconomic Policy Strategies for Growth and Stability in Cambodia, Lao PDR, Thailand, and Vietnam: A Panel Data Study Phongthorn Wrasai_

Faculty of Economics, Thammasat University May 18, 2011

Abstract

The aim of this paper is twofold: first to examine impacts of macroeconomic policies on real economic activities among CLTV economies; and second, to identify plausible sources of variation in real economic activities resulting from the use of macroeconomic policy tools. Major findings are as follows. First, not surprizingly, it is confirmed that export is the main engine for growth. Second, it is evident that over time horizon, among CLTV economies, expansionary fiscal policy has a positive impact on real output but size of the impact is demunitive. Third, monetary and exchange rate policy play an insignificant role of enhancing growth. A policy implication is that to achieve long term growth, export promotion policy focusing on capacity building and productivity enhancing is vital.

บทคัดย่อ

บทความวิจัยนี้ประกอบวัตถุประสงค์👉ลัก 2 ประการ คือ 1) เพื่อตรวจสอบผลกระทบจากการดําเนิน นโยบายเศรษฐกิจมหภาคต่อกิจกรรมทางเศรษฐกิจทแท้จริงในประเทศกัมพูชา ลาว ไทย และเวียดนาม 2) เพื่อระบุที่มาของการแปรผันของกิจกรรมทางเศรษฐกิจทแท้จริงที่เกิดจากการดําเนินนโยบายมหภาค บทวิจัย ค้นพบว่า อย่างแรก การส่งออกเป็นตัวขับเคลอนที่สําคญของเจริญเติบโตของเศรษฐกิจ อย่างที่สอง นโยบาย การคลังเพอกระตุ้นเศรษฐกิจก่อให้เกิดผลบวกต่อผลผลิตที่แท้จริงในเศรษฐกิจของกัมพูชา ลาว ไทย และ เวียดนาม แต่ผลดังกล่าวนั้นเล็กนอยมาก อย่างที่สาม นโยบายการเงินและนโยบายอัตราแลกเปลี่ยนมีบทบาท สําคัญในการส่งเสริมการเจริญเติบโตของเศรษฐกิจ ในแง่นโยบาย นโยบายที่ส่งเสริมการส่งออกโดยการเพิ่ม ความสามารถและประสิทธิภาพการผลิตเป็นสิ่งจําเป็นมากเพื่อบรรลุเป้าหมายการเจริญเติบโตของเศรษฐกิจใน ระยะยาวของประเทศทั้งสี่

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Macroeconomic Consequences of Thailand’s Exchange Rate Policy

Bhanupong Nidhiprabha*

Faculty of Economics, Thammasat University

Keywords: Exchange rate policy; Thailand; effectiveness of macroeconomic policy

1. Introduction

In the first three decades of Thailand’s economic development plans between 1961 and 1990, GDP grew steadily at an annual rate of 7 percent. During this period, trade volume rose from 35 to 75 percent of GDP. Rapid economic growth was achieved without sacrificing price stability. It can be argued that the fixed exchange rate system contributed significantly to trade expansion and rapid output growth in the early stage of Thailand’s economic development. Initially the baht was pegged at 20.8 baht to the US dollar in 1963. It was kept at that level for ten years before it was revalued to 20 baht, when the Brentton Woods system broke down in 1973. The baht had been fixed at that level until the basket of currencies system was introduced in 1978. The currencies in the basket included the US dollar, Japanese yen, West German mark, UK pound sterling, Malaysian ringgit, Hong Kong dollar, and Singapore dollar. Then came the first devaluation in July 1981; the baht was devalued by 8.7 percent to 23 baht to the dollar. The second devaluation of 14.7 % took place in 1984. Devaluations in the 1980s were carried out as the last resort when other policies failed to correct the unsustainable current account deficit. But after the external disequilibrium was corrected by establishing a realistic exchange rate, the old habit died hard. The system of a basket of currencies of the Thai baht adopted after 1984 was supposed to give baht more flexibility. It turns out that the weight given to the dollar in the basket increased gradually up to July 1997. The currency-basket system set the exchange rate of the baht at 25.8 baht to the dollar at the end of June 1997. In practice, the baht had returned into the old regime of fixed exchange rate despite a de jury currency-basket system.

With increasing integration, the costs of maintaining a fixed exchange rate regime may outweigh its benefits. If monetary authorities envisage the virtue of maintaining exchange rate stability and competitiveness, intervention in the foreign exchange markets may reduce the effectiveness of macroeconomic policy.

*This research is supported by the Thailand Research Fund. Valuable comments and suggestions of two anonymous referees are gratefully acknowledged. I thank Panit Wattanakoon for excellent research assistance.

Although the fixed exchange system created stability of the exchange rate, the increasingly rising weight of the US dollar in the basket caused an appreciation of the baht when the dollar appreciated against other world currencies. Overvaluation of the baht resulted in the loss of competitiveness. The exchange rate was maintained by constant intervention in the foreign exchange markets. The fear of floating can be thought of as a reason for such intervention (Calvo and Reinhart, 2002). The fact that Thai financial institutions borrowed heavily in dollars, allowing the baht to depreciate substantially to correct the current account deficit would damage the balance sheets of banks and finance companies. The Bank of Thailand continued intervening in the spot and forward exchange markets despite the substantially loss in international reserves. Adverse consequences of the fixed rate had become more apparent after the confidence in the baht was further eroded by speculative attacks.

On July 2, 1997, the Bank of Thailand gave up defending the baht; the exchange rate plunged to 27.4 baht to the dollar. But that was just the beginning of the long slide of the baht. The value of the baht kept on declining and triggered the Asian financial crisis. Other regional currencies also suffered similar steep declines. When an exchange rate has been unrealistically fixed for so long, the cost would soon outweigh its benefits. After the float of the baht in 1997, the baht depreciated to a record low of 55 baht to the dollar in January 1998.

The baht continued to gain strength against the dollar, which depreciated to correct the unsustainable current account deficit of the US. The strength of the baht could have been more spectacular if there was no market intervention by the Bank of Thailand. As the level of international reserves kept on rising, the question arises whether the accumulated reserves can be put into good use such as financing budget deficit or repaying debts accumulated from the bailout of financial institutions. The principal reason for the intervention is the unwarranted fear that strong baht would hurt Thai exports and slow down economic growth. The central bank therefore must keep the baht at a competitive level. The Bank of Thailand still intervenes regularly to prevent the baht from rapid appreciation. As a result, the amount of international reserves increased to 138 billion dollar in 2009, from 26.9 billion dollars in 1997. During this period, the baht appreciated from 47.2 to 33.3 baht to the dollar.

Thailand was able to grow rapidly between 1960 and in the early 1990s because of strong growth in exports and investment. From 1990 to 2008, the share of exports in GDP increased from 40 % to more than 70%. After the collapse of financial institutions in 1998, investment ceased to be an important growth contributor. The share of investment in GDP declined from 40 % to 20 % in 2000. But exports still remained as the last engine of growth up to the 2008 global recession.

Thailand’s imported raw materials are used to manufacture export products. If Thailand experiences export shortfalls, imports can be curtailed. Thus the global slowdown that shrinks the demand for Thai manufactured exports would not lead to current account deficit. Imports moved closely together with exports, implying that large parts of imports are raw materials used to manufacture exports products.

The contribution to growth of exports must not be exaggerated, as exports simultaneously lead to imports of raw materials. The structure of Thailand exports has considerably changed from agricultural commodities to manufactured products. Imported parts and components of electronic products are required to manufacture computer products such as hard disks and computers. It is not surprising that these industries create lower value added than agricultural and processed food exports that mainly utilize domestic raw materials. This important

realization would reduce the urge to maintain the baht unrealistically low in order to promote growth.

This paper examines Thailand’s exchange rate policy and their macroeconomic impacts over the past decades. It provides critical review on the choice by the Bank of Thailand and draws important lessons from Thailand’s mistakes on the choice of exchange rate systems. The paper is organized as follows. Section 2 discusses the impact of the transition from the fixed to managed flexible systems. Section 3 explores the relationship between export competitiveness and the exchange rate systems. Sector 4 investigates the impact of intervention in the foreign exchange markets and capital controls. Section 5 deals with macroeconomic policy responses and examines Thailand’s exchange rate policy during the global economic slowdown. Section 6 concludes.

2. Fixed vs. flexible exchange systems

In addition to containing foreign exchange risk to promote international transactions, the fixed exchange rate can provide steady growth path. Central banks therefore intervene regularly in the foreign exchange markets. There are theoretical arguments in favor of intervention in the foreign exchange market. There is a link between the variability of exchange rates and interest rates (Bilson, 1985). Since interest rate fluctuations are the causal factor to business cycle, as currency risk premiums increase, interest rates must increase to compensate for the risk. Thus the combination of real interest rate instability and real exchange rate instability must have an adverse effect on the economy. There are also internal factors such as domestic monetary shocks or political uncertainties that create currency volatility, which depends on the choice of exchange rate regime, provided that prices are stickier than the exchange rate (Hasan and Wallace, 1996).

Krugman (1989) further argued that the gains from international trade would be reduced since exchange rate instability blurs the price signals that are supposed to regulate international markets. When future exchange rates are uncertain, firms would be more cautious and delay investment, even when they face increases in demand for their exports. Here the case for the fixed exchange rate arises from the need to accumulate physical capital at the early stage of development; Thailand greatly benefited from the fixed exchange rate system between the 1960s and the early 1980s. In the early stage of economic development, a country can experience steady growth while maintain a fixed exchange rate.

According to Friedman (1953), speculations are likely to be stabilizing as long as market participants are rational. When markets are efficient, there is no room for destabilizing speculation. However, as we have seen from the Asian financial crisis in 1997 and the US subprime loans crisis in 2008, speculative behaviors are not always stabilizing. There is no concrete evidence of efficient asset markets. In the case of Thailand, there are periods of the departure from the uncovered parity, which corresponds to high level of risk premiums. There exists a possibility that speculation might be destabilizing and the negative externality provides a reason for intervention.

Pegging an exchange rate can lead to unrealistic values when productivity and price levels change over time. The Purchasing Power Parity (PPP) may not provide a benchmark for the target exchange rate. Substantial departures from the PPP, even in a world of flexible exchange rate, can exist in the short run and even over decades (Obstfeld and Rogoff, 1995).

With considerable differential between productivity growths in tradable and non-tradable goods sectors, a country can experience rising relative prices of non-tradable goods, resulting in the appreciation of the real exchange rate. It is therefore impossible to pinpoint the exact equilibrium value of the exchange rate from deviations from the PPP. Nor can the current account deficit indicate an exact degree of overvaluation of the exchange rate. Investment- saving relationship and the level of public deficit also determine the current account position. Indeed, intervention in foreign exchange markets to obtain an appropriate value of the exchange rate must be exceedingly difficult, not to mention complications arising from the fact that changes in the exchange rate will also have an impact on domestic absorption.

A flexible exchange rate enables the baht to become more flexible in response to fluctuations in world trade volume. Broda (2004) provided evidence that short-run real output responses to real shocks are significantly smoother in floats than in pegs. Furthermore, Coudert and Couharde (2009) found that pegged currencies were significantly more overvalued than flexible currencies. Real exchange rate volatility had a negative impact on private investment (Bhandari and Rabindra, 2010). According to Kenen and Rodrik (1986), volatilities of real exchange rates reduced the volume of international trade. Exchange rate fluctuations constitute risks and uncertainties, which could disrupt international trade flows. Exchange rate volatility has a significant negative impact on the export flows to the world market (Chit, et al, 2010). Even when the nominal exchange rate remains unchanged, the real effective exchange rate can fluctuate as a result of the movements of major currencies. Relatively high inflation at home can bring about the loss in international competitiveness.

Figure 1: Real Effective Exchange Rates: 1993-1996

Real Effective Exchange Rates 1993-1996

140

130

Jan 1993=100

120

110

100

(JPY)

(USD)

(THB)

(SGD)

(MYR)

(EU)

Jan-93

Apr Jul Oct Jan-94

Apr Jul Oct Jan-95

Apr Jul Oct Jan-96

Apr Jul Oct

Source: International Financial Statistics

The real effective exchange rate of the baht had appreciated more than important trading partners since 1994 (Figure 1), after Thailand embraced capital account liberalization, which encouraged borrowing in foreign currencies. By the end of 1996, except the Singapore dollar, the real effective exchange rate of the baht appreciated more than the yen, the ringgit, and the US dollar. The fixed exchange rate of the baht to the dollar did not reveal the erosion of Thailand’s competitiveness.

Figure 2: Fluctuations of the baht: January 1990-December 2010

Baht-dollar exchange rate Jan 1991-Dec 2010

120

100

% change, y-o-y

-20

Jan-91

Sep-91 May-92 Jan-93 Sep-93 May-94 Jan-95 Sep-95 May-96 Jan-97 Sep-97 May-98 Jan-99 Sep-99 May-00 Jan-01 Sep-01 May-02 Jan-03 Sep-03 May-04 Jan-05 Sep-05 May-06 Jan-07 Sep-07 May-08 Jan-09 Sep-09

May-10

-40

Source: The Bank of Thailand

The continued strength of the dollar in 1995 caused overvaluation of the baht, which was corrected by a free fall of the baht against the dollar in the second half of 1997. Figure 2 illustrates the wide swings of the baht after the float in July 1997. By 1999, the baht began to depreciate once again but the degree of depreciation was greater than the appreciation. It seems that there was asymmetric intervention to maintain the bath stability.

Table 1: Fear of Appreciation

	Jan 1991- June 1997	June 1997- Dec 1999	2000-2010
Appreciation	-1.12	-11.93	-5.94
Depreciation	1.21	40.87	5.90
Overall	0.05	14.47	-0.02
Source: Bank of Thailand and Author's calculation

As Table 1 indicates, The Bank of Thailand intervened less when the baht depreciated and more when the baht appreciated. From 1991 to June 1997, on the year-on-year average based on monthly percentage change, the baht appreciated against the dollar by 1.12 percent, while it depreciated by 1.21. As a result the baht maintained its par with the dollar during the fixed

exchange rate system. Between June 1997 and December 1999, the baht depreciated by 40.9 percent on the average, as opposed to a 11.9 percent rate of appreciation on a monthly basis. During the period 2000 and 2010, the average rate of appreciation was 5.94, while the depreciation was 5.9 per cent. Indeed, the figures in Table 1 demonstrates that the Bank of Thailand intervene regularly to maintain the baht stability, despite the trend of dollar depreciation against major currencies. Thus the behavior of the Bank of Thailand remained unchanged before and after the financial crisis in 1997.

3. Export competitiveness and exchange rate regimes

Aside from the possibility of retaliation by other competitors, devaluation does not ensure a long-lasting effect on international competitiveness, which depends on its productive labor force, saving, and technological progress. It is possible that a strong currency is associated with export competitiveness of that country. A country with high rate of saving and rapid productivity growth will experience a real exchange rate appreciation, while commanding a considerable degree of international competitiveness. It has always been suggested that Thailand needs a weak baht to help exporters to gain competitiveness. Since changes in the price of foreign currencies have a profound effect on prices of all commodities, the impact of changes in foreign exchange rates on the rest of the economy must be evaluated. Implication on income distributive issue must be examined at which it involves income transfers between exporters and importers, tradable and non-tradable sectors, creditors and debtors of foreign currencies.

Flexibility in the real wage rate in Thailand could explain why Thailand was able to maintain the fixed exchange rate for so many years1. According to Obstfeld (1998), before the crash in

1997, Thailand had been a puzzle since it was very rare for countries to observe the fixed exchange rate discipline longer than five years. Flexibility of wages and prices would not necessitate Thailand to rely on flexible exchange rates as a means to correct macroeconomic imbalances. Furthermore, conservative fiscal policy (fiscal surplus) prior to the 1997 crisis helped mitigate monetary expansion caused by capital inflows. Monetary base growth was prevented from being explosive, threatening price stability under the fixed exchange rate system with open capital account. With many policy objectives, the fixed exchange rate system, previously worked so well as a domestic anchor, must be sacrificed.

A depreciation of the real effective exchange rate does not always imply a gain in price competitiveness. What is important is not only the direction of the movement but also its gap between the actual and equilibrium real exchange rates. A real depreciation would not improve competitiveness much if the actual real effective rate is significantly overvalued. A real appreciation may not necessarily imply a loss in competitiveness if it reflects productivity gain.

1 The flexibility of the wage rate continued in the late 2000s. Domestic demand grew 2.3 % and 4.1 % in 2007 and 2008, respectively, while the real wage rate rose by 0.7% and 4.8%. When domestic demand contracted by 6.6 % in 2009, real wage rate declined by 1.6%. See Nidhiprabha (2003) for the discussion on wage flexibility and implication on the trade-off between inflation and unemployment.

Figure 3: Real Effective Exchange Rates: 2000-2010

140

130

120

110

100

Jan-00

Jul-00 Jan-01 Jul-01 Jan-02 Jul-02 Jan-03 Jul-03 Jan-04 Jul-04 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10

Jul-10

JPY MYR SGD THB USD

Source: International Financial Statistics

Between 2001 and 2005, the real effective exchange rate of the baht depreciated by 10 percent (Figure 3). The weakened baht helped the Thai economy recover from the recession through strong export growth. This depreciation had a lot to do with the strength of the dollar in the early 2000s. While the real effective exchange rate of the yen depreciated from 2000 to 2007, the weakening of the dollar began only after 20032. The weaknesses of both currencies gave rise to real effective appreciation of the baht that began in 2005—an episode that led to the adoption of capital controls in Thailand in December 2006. By 2007 the yen started climbing and the dollar started appreciating in the following later, leading to depreciation of Thailand’s real effective exchange rate, relieving the upward pressure on the baht.

Since 2005, the real effective exchange rate of the Thai baht has moved closely with the Malaysian ringgit, while the real effective exchange rates of the yen and the dollar moved in the same direction. By 2009, the dollar and the yen depreciated by 30 and 20 percent respectively, while the Singapore dollar appreciated by 30 percent, compared to the level of the real exchange rates in 2000.

When monetary authorities allow the baht to fluctuate more freely, it will be difficult to target a specific level of real effective exchange rate—let alone its direction3. The real effective exchange rate of the baht always moves in an opposite direction of the yen and the dollar, while the impact of the dollar movement has become increasingly more dominant. The implication of this long-term relationship is that the interest rate policy that the Bank of Thailand employed to target the real effective exchange rate may not be effective since the real effective exchange rate of the baht is determined by key currencies. When the real effective rates of the dollar and the yen depreciate, the real effective rate of the baht would

2 The impact of the dollar decline on the US current account deficit was not apparent until 2008, when the US economy entered the recession.

3 For evidence on temporary movements of the real dollar rates and interest rate differentials, see Nakagawa (2002).

appreciate accordingly. Liew et al (2009) also found that the influences of domestic and foreign monetary policy on exchange rates of Thailand can hardly be neglected. With more open capital account, the Bank of Thailand has to choose between targeting the exchange rate or the money supply. Capital controls permitted the Bank of Thailand to pursue monetary policy to deal with internal equilibrium adjustment. At the end of 2006, capital control was utilized to delay the baht appreciation against the dollar.

4. Market intervention and capital controls

A fixed exchange rate system together with an open capital market is incompatible with independent monetary policy. This is a lesson Thailand has learned so well after the currency crisis in 1997. The fixed exchange rate functioned well with monetary autonomy and a certain degree of capital controls. When capital controls were relaxed in 1993 to liberalize capital account, monetary autonomy was sacrificed. Trade reform can improve efficiency and resource allocations. However, as Bhagwati (1998) pointed out, there was a big difference between trade and capital flows liberalization. Capital account liberalization does not always lead to welfare improving because financial infrastructure is not ready to cope with capital inflows. Lack of financial supervision and prudential rules and regulations on financial institution led to excessive lending and property bubbles. Eichengreen (2000) suggested that the Chilean-styled capital control should be retained until banks’ risk management practices and regulatory oversight have been upgraded. Capital control is found to be sufficiently supported by both economic theory and empirical evidence as a means to address some macroeconomic problems associated with short-term capital flows (Montecino and Cordero, 2010).

The exchange rate is determined by trade and capital flows, in addition to external factors and exchange rate expectations. Exchange rate movements can be thought of as an indicator of country risks. A sharp plunge in the value of baht would signify the government's mismanagement of the economy. The sharp deterioration of the external value of baht in the last quarter of 1997, to some extent, reflected the loss in policy credibility of the ruling government during the turmoil period.

Since capital controls are costly to enforce and they may reduce welfare arising from intertemporal consumption, total capital control is out of the question. Nevertheless, to the extent that excessive short-term capital flows also raise the possibility to a financial crisis, limiting these hot money flows should be done through establishing prudential regulations on foreign borrowing of the private sector.

The flexible exchange rate system also sends a signal to the private sector that borrowers of foreign capital must internalize some of the costs of failing to hedge against unanticipated movements of exchange rates. The need for strict capital controls was reduced as capital flight declined. Flexibility in foreign exchange rates guarantees that there is no serious misalignment of the exchange rate. As such the chance of experiencing capital flight would be reduced, provided that both economic fundamentals and political stability prevail. Recent evidence provided by Dubas (2009) indicated that an intermediate exchange rate regime between a pure float and a hard peg is most effective in preventing exchange rate misalignment. In addition, welfare level of a small country under a freely floating regime was in general higher than that under other regimes (Akiba et al, 2009).

The movement of the effective exchange rate is still determined by the dollar/baht rate because of the dominance of the dollar in international trade transactions. Depreciation of the baht against the yen slowed down the appreciation of the nominal effective exchange rate of the baht. As a result, the nominal effective rate did not appreciate as much as the baht dollar exchange rate. Market intervention cannot maintain the competitiveness of the baht (when using the effective rate measurement).

According to Taylor (2001), an appreciation of the exchange rate, through inertial effects of exchange-rate transmission and the existence of a policy rule, will result in a decline in interest rate today. Even though the exchange rate is not directly in the policy rule, because of the appreciation of the exchange rate today, the probability that the central bank will lower the interest rate in the future will increase as inflationary expectations would be revised downward. Monetary-policy rules that react indirectly to the exchange rate might work better than the rules that react directly to exchange rate changes. In this framework, if the Bank of Thailand does not resist the baht appreciation, there would be less need for the Bank of Thailand to initiate interest hikes to curb inflation.

The intervention cannot slow down the baht appreciation, which was caused by the weakness of the dollar itself. The Bank of Thailand cannot resist the trend of baht appreciation through intervening in the foreign exchange markets4. Figure 4 indicates that increased intervention, as measure by the ratio of net forward position as percentage of total reserves, did not stop baht appreciation.

As the clear trend of baht appreciation emerged at the beginning of 2006, exporters did not want to hold dollars for long after receiving payments. Figure 4 shows that, as the weakening trend of dollar continued, the Bank of Thailand suffered enormous financial loss in buying the dollar forward in order to reduce the pressure on the baht. From January 2003, when the net forward position (NFP) was a few percentages of total reserves, the intervention was intensified as the baht appreciated in 2006 and 2007. By January 2008, the amount of net forward position of the Bank of Thailand peaked at 24 % of total reserves.

The international reserves were accumulated every month; the Bank of Thailand would have to sterilize capital flows by issuing bonds to mob up excess money supply5. By doing so, it

built up pressure on the interest rates. As the federal funds rate was cut continuously to prevent recession in the US, the Bank of Thailand was not able to maintain high interest rates to fight inflation, because the widening uncovered interest differentials would further induce capital inflows and currency appreciation.

4 Cointergration analysis indicates that the ratio of net forward position to total reserves moves in line with the rate of change of the baht exchange rate.

5 By 2011, The Bank of Thailand is able to issue bonds without seeking the approval of the Ministry of Finance.

Figure 4: Forward market intervention by the Bank of Thailand

25 40

20 38

5 30

Jan-06

Mar-06 May-06 Jul-06 Sep-06 Nov-06 Jan-07 Mar-07 May-07 Jul-07 Sep-07 Nov-07 Jan-08 Mar-08 May-08 Jul-08 Sep-08 Nov-08 Jan-09 Mar-09 May-09 Jul-09

Sep-09

0 28

Source: Bank of Thailand

NFP/Reserves(%) Baht/Dollar (RHS)

In a desperate attempt to prevent baht appreciation, a zero-interest reserve requirement of 30% on short terms flows was imposed in December 2006. In effect, there was a separation between the onshore and offshore markets of the baht (Figure 5). Since, the strength of the baht was caused by portfolio inflows; it was not surprising that the Bank of Thailand attempted to stem the flows of portfolio investment by imposing the Chilean-typed capital controls. The Bank of Chile imposed a 30 % unremunerated reserve requirement (URR) in 1991 to curb short-term capital inflows, which tended to cause domestic currency appreciation. Although the URR did not reduce capital inflows nor stop currency appreciation, it changed the composition of the inflows from short to longer maturity. Forbes (2007) found evidence that the Chilean URR increased financial constraints for small firms and misallocation of resource took place because the control discriminated against short-term projects and firms that depend heavily on bank credit.

Investors in the stock markets were against the capital controls because the control measure inhibited capital inflows to the stock market. The URR measure led to the collapse of the stock market and prompted the Bank of Thailand to exempt portfolio investment from the capital controls, just one day after the announcement of the measure. The Bank of Thailand further relaxed and exempted debt instruments and forward covered transactions from the URR.

Figure 5: Separation of foreign exchange markets

Baht at different markets

44 12

42 10

Baht/USD

40 8

38 6

36 4

34 2

32 0

Jan-05

Mar-05 May-05 Jul-05 Sep-05 Nov-05 Jan-06 Mar-06 May-06 Jul-06 Sep-06 Nov-06 Jan-07 Mar-07 May-07 Jul-07 Sep-07 Nov-07

Jan-08

30 -2

onshore offshore Differentials (%)

Source: Bank of Thailand

There is no evidence that the capital controls imposed in 2008-2009 had significantly slowed down the appreciation as the Bank of Thailand hoped. There are also unintended effects of the capital controls. Asiedu and Lien (2004) found the evidence that capital controls deters foreign direct investment in East Asian countries. In 2007, although foreign investment in Thailand increased, the percentage increase is much lower than neighboring countries such as Malaysia and Vietnam. However, Coelho and Gallagher (2010) suggested that, by employing Columbia and Thailand as case study, there is still a role for capital control in the 21st century, but such controls should be more sophisticated than in years past. The fact that capital controls are envisaged as anti-globalization by investors, among other policies of the military-installed government, the Chilean-style capital control measure became counterproductive and costly in terms of financial losses of the Bank of Thailand. In addition, exporters would have no incentives to improve their efficiency, since they have been relying on undervalued currencies. Moral hazard arises as exporters believe that the government would help them by keeping competitive exchange rates.

Figure 6 shows deviations of different types of capital flows from its trend. Portfolio investment, bank flows, and foreign direct investment fluctuated wildly after the imposition of capital controls in December 2006. On the contrary, other types of capital flows (OTHER) experienced a significant decline in its volatility. These flows were deposited in non-resident baht accounts, which can be later used for speculative purposes in currency and bond markets. These flows were related to the speculation that the baht would eminently devalued. The irregular flows returned to normal after the massive devaluation in 1998.

It is not surprising to see wider fluctuation of portfolio investment in the aftermath of capital controls. A striking finding is that foreign investment, which is not supposed to fluctuate widely, became more volatile. It suggests that foreign investors are affected by uncertainty and policy inconsistency of the Thai government after the restriction of capital flows. The capital control was a wrong policy applied for the wrong season. Thailand had maintained an open-door policy to foreign investors. The authorities believed that capital controls would have no impact on long-term investors as the policy was applied only to short-term flows and for a specific duration. Little did the authorities know are those animal spirits of investors do not distinguish between short-term and long-term control measures. When policy becomes

inconsistent with past expectations, risk premium was heighten resulting in massive capital flights from the stock market.

Figure 6: Volatility of capital flows (normalized values)

6 6

3 2

0 -2

-1

-4

-2

-3

94 96 98 00 02 04 06 08

-6

94 96 98 00 02 04 06 08

FDI

BANK

-1

-2

-3

-4

94 96 98 00 02 04 06 08

-1

-2

-3

-4

-5

94 96 98 00 02 04 06 08

OTHER

PORTFOLIO

Source: Bank of Thailand

The Stock Exchange of Thailand recorded the single biggest one-day loss of 820 billion baht in its history—a decline by 14.8% within one day after the announcement of the measures. Finally, on March 3, 2008 the Bank of Thailand abandoned the capital controls, reasoning that the economic situation had returned to normality and there was no need for such controls. After the fear of global recession subsided in late 2009, capital inflows into the stock market resumed and the baht regained its strength6. It is important to understand the macroeconomic

policy consequences of the attempt to maintain the weak baht.

5. Macroeconomic policy responses to global recession

Despite the global slowdown that began in 2007, Thai exports, due to agricultural commodity booms, maintained high growth until the first half of 2008. The collapse of the exports in 2009 led to a deeper cut in imports as the oil price also declined sharply in the first half of

6 The Stock Exchange Index of Thailand rose to 43.8 % in February 2, 2011 from December 30, 2010.

2009. It is argued here that the demand for Thai exports depend more on foreign income than relative prices. When compared to changes in income level of importing countries, changes in exchange rates have lesser impact on Thailand’s exports level. Since income elasticity of Thailand’s exports is high, its economy is vulnerable to world demand shocks.

As the world interest rate has considerably declined to a very low level, there is a limit to stimulate domestic demand to offset the contracted world trade. Expansionary fiscal policy is called upon in time of recession. Bond-financing budget deficit would be ineffective if the crowding-out effect is so strong that it induces capital inflows and causes currency appreciation. On the other hand, deficit spending financed through foreign borrowings or pump-priming can stimulate the economy during recession in the absence of the crowding- out effect.

According to the Mundell-Fleming model, fiscal policy employed under the fixed exchange rate regime is less effective than when it is employed under the flexible exchange rate system. On the other hand monetary policy is more powerful under the flexible exchange rate system. This conclusion is based on the assumption that a country will experience balance of payments surplus after employing expansionary fiscal policy. Likewise, the conclusion on monetary policy ineffectiveness assumes that the country will experience balance of payments deficit after pursuing easy monetary policy. Therefore an exchange rate appreciation mitigates the expansionary effect of fiscal policy, while a depreciation of the exchange rate enhances the expansionary effect of the monetary policy.

It is argued here that fiscal policy under a certain degree of exchange rate flexibility can be effective under a certain circumstance. Imagine the case when expansionary fiscal policy leads to a deficit in the balance of payments. This is not unusual if the income elasticity of demand for imports is very high; while the responsiveness of capital flows to interest rate differentials is very low. The slow responses of capital flows to changes in interest rates can be attributed to high transaction costs, risk premiums, and capital controls. The exchange rate adjustment after fiscal expansion brings about currency depreciation instead of appreciation. The exchange rate effect would intensify the multiplier effect of fiscal policy through increased net exports. In sum, the effectiveness of fiscal expansion depends on its impact on the balance of payments and the resulted exchange rate changes that can intensify or nullify the first round effect of fiscal policy expansion.

During fiscal contraction, output reduction leads to larger reduction in imports, while falling interest rates would not be able to create capital outflows to offset the fall in imports. The resulted surplus in the balance of payments would imply currency appreciation and magnify the output contraction effect of the fiscal austerity through reducing net exports. The bottom line of this analysis is that fiscal policy may not be totally ineffective under the situation in Thailand, where the income elasticity of demand for imports is high and capital flows are not so sensitive to changes in interest rate differentials.

In order to examine the impact of policy changes on output, a vector autoregressive model of five macroeconomic variables is employed. It is imperative to understand the impact of various policy responses to recession. The VAR model can suggest the relative strength of monetary and fiscal policy when the policy interest rate is allowed to adjust. Monthly data from January 1993 to May 2009 are utilized in the model which includes output (manufacturing production index), exports, fiscal spending (FISCAL), the Bank of Thailand’s

key policy rate (BOTRATE), and the real effective exchange rate (REER). All data are obtained from the Bank of Thailand.

A VAR model is implemented to examine the effects of certain shocks to macroeconomic variables. All the equations that contribute to figure 7 and 8 are listed below. The length of the lags, suggested by the Akaike Information Criterion, is four months.

𝑡 𝑡 𝑡 𝑡 𝑡

𝑂𝑈𝑇𝑃𝑈𝑇𝑡 = ∑ μ1𝑖𝑂𝑈𝑇𝑃𝑈𝑇𝑡−𝑖 +∑ 𝛼1𝑖𝐹𝐼𝑆𝐶𝐴𝐿𝑡−𝑖 +∑ 𝛽1𝑖𝐸𝑋𝑃𝑂𝑅𝑇𝑡−𝑖 +∑ 𝛾1𝑖𝐵𝑂𝑇𝑅𝐴𝑇𝐸𝑡−𝑖 +∑ ð1𝑖𝑅𝐸𝐸𝑅𝑡−𝑖 + 𝜀1𝑡

1 1 1 1 1

𝑡 𝑡 𝑡 𝑡 𝑡

𝐹𝐼𝑆𝐶𝐴𝐿𝑡 = ∑ μ2𝑖𝑂𝑈𝑇𝑃𝑈𝑇𝑡−𝑖 +∑ 𝛼2𝑖𝐹𝐼𝑆𝐶𝐴𝐿𝑡−𝑖 +∑ 𝛽2𝑖𝐸𝑋𝑃𝑂𝑅𝑇𝑡−𝑖 +∑ 𝛾2𝑖𝐵𝑂𝑇𝑅𝐴𝑇𝐸𝑡−𝑖 +∑ ð2𝑖𝑅𝐸𝐸𝑅𝑡−𝑖 + 𝜀2𝑡

1 1 1 1 1

𝑡 𝑡 𝑡 𝑡 𝑡

𝐸𝑋𝑃𝑂𝑅𝑇𝑡 = ∑ μ3𝑖𝑂𝑈𝑇𝑃𝑈𝑇𝑡−𝑖 +∑ 𝛼3𝑖𝐹𝐼𝑆𝐶𝐴𝐿𝑡−𝑖 +∑ 𝛽3𝑖𝐸𝑋𝑃𝑂𝑅𝑇𝑡−𝑖 +∑ 𝛾3𝑖𝐵𝑂𝑇𝑅𝐴𝑇𝐸𝑡−𝑖 +∑ ð3𝑖𝑅𝐸𝐸𝑅𝑡−𝑖 + 𝜀2𝑡

1 1 1 1 1

𝑡 𝑡 𝑡 𝑡 𝑡

𝐵𝑂𝑇𝑅𝐴𝑇𝐸𝑡 = ∑ μ4𝑖𝑂𝑈𝑇𝑃𝑈𝑇𝑡−𝑖 +∑ 𝛼4𝑖𝐹𝐼𝑆𝐶𝐴𝐿𝑡−𝑖 +∑ 𝛽4𝑖𝐸𝑋𝑃𝑂𝑅𝑇𝑡−𝑖 +∑ 𝛾4𝑖𝐵𝑂𝑇𝑅𝐴𝑇𝐸𝑡−𝑖 +∑ ð4𝑖𝑅𝐸𝐸𝑅𝑡−𝑖 + 𝜀4𝑡

1 1 1 1 1

𝑡 𝑡 𝑡 𝑡 𝑡

𝑅𝐸𝐸𝑅𝑡 = ∑ μ5𝑖𝑂𝑈𝑇𝑃𝑈𝑇𝑡−𝑖 +∑ 𝛼5𝑖𝐹𝐼𝑆𝐶𝐴𝐿𝑡−𝑖 +∑ 𝛽5𝑖𝐸𝑋𝑃𝑂𝑅𝑇𝑡−𝑖 +∑ 𝛾5𝑖𝐵𝑂𝑇𝑅𝐴𝑇𝐸𝑡−𝑖 +∑ ð5𝑖𝑅𝐸𝐸𝑅𝑡−𝑖 + 𝜀5𝑡

1 1 1 1 1

The impulse response function (Figure 7) indicates that export shocks exert the strongest impact on output. Both positive and negative shocks bring about massive changes in output level. It is not surprising that the Thai economy suffer from recession in 2009 as exports collapsed. Can exchange rate depreciation spur growth through exports? Currency shocks do not have a significant impact on output growth.

Figure 7: Impact on output from shocks and policy responses

Response of OUTPUT to Cholesky One S.D. Innovations

-1

-2

1 2 3 4 5 6 7 8 9 10

Fiscal expansion Exports

Tight monetary policy Appreciation of REER

Appreciation of the real effective exchange rate may not lead to a heavy loss in competitiveness. Real exchange rate movements depend on domestic and foreign price levels. Exchange rate changes also affect the cost of imported raw materials and therefore would affect net exports and GDP relatively less than the shocks from fiscal and monetary policy

instruments. An important implication of this finding is that if we allow the real effective exchange rate to adjust to external disequilibrium, its impact on real output will be gradual and smoother than in the fixed exchange rate regime. Indeed, a more flexible exchange rate can insulate the economy from external shocks.

The analysis of the impulse response function suggests that monetary policy can be effective under the current exchange rate regime. A rise in the key interest rate can lead to contraction in output. Thus monetary policy is an effective policy instrument to stabilize the economy. The implication of this finding is that as long as the Bank of Thailand can maintain the interest rate gap between domestic and foreign interest rates, there is a room for monetary policy to maneuver. The capital mobility of the Thai economy is far from perfect. Expansionary monetary policy can be employed to counteract the collapse in exports more effectively than fiscal stimulus (Figure 8). Fiscal policy is less effective in terms of stabilization objective. The expansionary effect of fiscal stimulus will become apparent after five months lag and will die off after three quarters.

Since export shocks create the greatest impact on output, we must understand how exports are affected by fiscal and monetary policy instruments. Figure 8 reveals that fiscal stimulus has minimal impact on exports. Exports are not unfavorably affected by fiscal expansion. An appreciation of the real effective exchange rate indeed reduces the level of exports. Nevertheless, this negative impact dies off within three quarters. If fiscal expansion gives rise to pressure on the price level, real exchange rate appreciation can thwart export growth. Figure 8 also illustrates that monetary tightening does not always lead to export slowdown, simply because the real effective exchange rate is not affected much by tight monetary policy. View in this light, given other factors remain constant, monetary policy can be a powerful tool for stabilizing the economy as the baht has become more flexible than in the past.

Figure 8: Export responses to various shocks

Response to Cholesky One S.D. Innovations ± 2 S.E.

12000

Response of EXPORTS to FISCAL

12000

Response of EXPORTS to BOTRATE

8000 8000

4000 4000

0 0

-4000 -4000

-8000 -8000

-12000

2 3 4 5 6 7 8 9 10

-12000

1 2 3 4 5 6 7 8 9 10

12000

Response of EXPORTS to REER

12000

Response of EXPORTS to OUTPUT

8000 8000

4000 4000

0 0

-4000 -4000

-8000 -8000

-12000

1 2 3 4 5 6 7 8 9 10

-12000

1 2 3 4 5 6 7 8 9 10

Exports are largely responsive to output growth. With expansion in capacity output and greater degree of capital utilization, exports can be raised. The implication of this finding is that instead of engineering a weak exchange rate, exports can be raised in the long run through promoting flows of capital into productive sectors. Any measures that hinder capital inflows and foreign direct investment can reduce export growth in the long run. Political unrest and uncertainty, capital controls, protectionism, and policy inconsistency would entail the reduction of long-term capital flows and thereby reducing exports in the long run.

Thai monetary authorities are not willing to let the exchange rate adjust to equilibrate external imbalances. The burden of the adjustment falls on output. If the real exchange rate is allowed to appreciate in response to surplus in the balance of payments, export growth can slow down to prevent overheating the economy. Likewise, if the real exchange rate depreciates in response to deficit in the balance of payments, exports can be enhanced to stimulate the economy. The exchange rate is such an important macroeconomic policy variable that we cannot deprive of its equilibrating role.

Figure 9 illustrates that exports continued its rising trend despite the appreciation of the real effective exchange rate between 2005 and the first half of 2008. The global financial crisis led to a steep decline in exports in the last quarter of 2008 and continued into 2009 before it rebounded in 2010, when the world economy started to recover. During this period the real effective exchange rate also depreciated, partly as a result of the price deflation and economic contraction in 2009. When the Thai economy experienced a V-shaped recovery in 2010, as a result of revival of export and consumption demand, inflation started to pick up and led to the appreciation in the real exchange rate. After 2000, exports and the real effective exchange rate were positively correlated. Hence the strength of the baht does not necessarily imply poor performance in exports. The output effect on Thailand’s exports from world business cycles is more pronounced than the substitution effect resulted from exchange rate changes.

Figure 9: Exports and REER

600,000

500,000

400,000

300,000

200,000

100,000

100

Jan-00

Aug-00 Mar-01 Oct-01 May-02 Dec-02 Jul-03 Feb-04 Sep-04 Apr-05 Nov-05 Jun-06 Jan-07 Aug-07 Mar-08 Oct-08 May-09 Dec-09

Jul-10

Exports REER (RHS)

Source: Bank of Thailand

It is evident from Figure 10 that Thailand’ exports are dictated by world income and world trade volume, which fluctuates more than world business cycle, but the Thai exports were even more sensitive to world output growth than the world trade. The collapse of Thai exports in 2009 was due mainly to the world recession rather than the baht appreciation. On the other hand, the sharp rebound of Thailand’s exports by 28 % in 2010 can be attributed to the strong recovery of the world economy. It is a wishful thinking that undervalued currency can stimulate exports. It is a policy mistake to try to resist the baht strengthening when the world economy rebounds7.

Figure 10:

World Business Cycle and Thai Exports

percent

10 World trade volume

World GDP

5 Thai Exports (USD)

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

-5

-10

-15

-20

Source: Bank of Thailand

During the period of continued appreciation of the baht, the Bank of Thailand was under the pressure to resist the baht appreciation to protect exporters. The Bank of Thailand intervenes less in the forward market and thus allows the baht to appreciate against the dollar. The Bank of Thailand has gradually raised its policy interest rate to discourage inflationary pressure. There is a concern that the enlarged interest rate differential between the key policy and the federal funds rates would induce more capital inflows and further strengthen the baht.

In October 2010, the government revoked the 15 percent withholding exemption on interest and capital gains earned by foreign investors. The motivation of this policy is to prevent baht speculation as there was a surge capital flows in the bond market. Tax instrument was called upon to slow down the baht appreciation. Again this policy instrument is likely to fail to reduce capital flows, because the inflows are the result of portfolio investment in response to anticipation of capital gains in the Thai stock market.

7 Nidhiprabha (2010) provides evidence that sustained economic recovery requires growth in the world trade volume and enhanced business confidence.

The Bank of Thailand has promoted direct investment abroad to lessen the pressure on the strengthening baht. Listed firms are permitted to invest abroad. The ASEAN Economic Community framework for 2015 would ease the restriction on outward portfolio investment. With uncertainties in the recovery of the US economy and sovereign debt crisis in Europe, there would be more volatility of the baht. As such the Bank of Thailand still ponders the use of various kinds of capital control measures to curb capital inflows, hoping that they may have some deterrent effect on speculators.

6. Conclusions

Thailand benefited from the fixed exchange rate system between the 1960s and the 1980s when Thailand experienced steady growth rate while maintaining a fixed exchange rate to promote international trade. At the early stage of development, exports were the main growth driver. As the country developed further, other growth drivers such as investment and consumption became principal sources of growth. Exports contributed less to growth as imports also increased together with exports. There was a tendency to keep the exchange rate at a competitive level to propel export growth. When the country relied more and more on foreign capital flows to finance investment-saving gap, the current account deficit became unsustainable. For the Bank of Thailand, it was difficult to allow the baht to depreciate, because it would threaten the banking sector, which borrowed heavily in foreign currencies.

Nevertheless, maintaining the overvalued exchange rate of the baht for too long led to a drastic exchange rate adjustment that culminated into currency and banking crises in 1997. In the early 1990s when Thailand experienced rapid capital inflows, the Bank of Thailand did not permit the baht to appreciate against the dollar. If the baht had appreciated, the overheated economy and the ensuing economic crisis could have been avoided. During the period of 2006-2009, the baht was undervalued once again and the Bank of Thailand did not permit the baht to appreciate by the market force because of the concern that exports and economic growth could be jeopardized. A currency appreciation mitigates the impact of oil price shocks and would not have considerable impact on export growth, which is mainly dictated by the world trade volume. An unrealistic exchange rate policy to protect exporters for currency appreciation may result in moral hazard and discourage the incentive to enhance competitiveness through productivity improvement obtained from importation of capital goods.

Capital controls are instruments usually employed during currency crises. The fourteen- month capital control that began in December 2006 was unnecessary and ineffective. Furthermore it may have adverse consequences on foreign direct investment if it sends the wrong signal to investors who are worried about policy commitment to open capital markets.

The interest rate policy cannot be used to target the value of the baht. Foreign exchange market intervention by the Bank of Thailand was intensified when the baht appreciated against the dollar during the period 2006-2009. Intervention in foreign exchange markets was ineffective, because the baht/dollar exchange rate is determined by movements of major currencies and capital inflows to the stock market. An attempt to sterilize the flow would be costly and ineffective in the long run. When exchange rate changes are not allowed to correct current account disequilibrium, adjustments have to take place through output level. With more flexible exchange rate movements, the burden of adjustment would not fall solely on output fluctuations.

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Fiscal policy for growth and stability: Lessons from Thailand Bhanupong Nidhiprabha

Thammasat University

ABSTRACT

1. Introduction

Most countries that suffered from the global financial crisis between 2007 and 2009 employed expansionary fiscal policy to counteract the shortfall in exports. In developing countries where monetary policy instruments have some limitations, fiscal stimulus is the only policy measure available to compensate the declining export demand from advanced countries. Thailand’s exports continued increasing in 2008 despite the impact of the global economic slowdown that began in 2007. The temporary commodity boom and the food price crisis gave rise to such impressive performance of Thai exports in 2008. From 2000 to 2008, the increasing trend of exports was evident. However, when the global financial crisis finally hit the Thai economy, exports declined sharply in 2009. This was also the period when domestic investment and consumer spending were subdued. Thus the contraction of both external and internal demand caused real GDP to decrease by 2.3 % in 2009. It was the first time that the Thai economy experienced a recession since the massive output contraction of 10 % in the aftermath of the currency and financial crises in 1998. The recession was short- lived, although massive value of financial assets was destroyed during the meltdown of financial institutions. It was the rapid growth exports that restored growth. Since the Asian

financial crisis did not spread to the rest of the world, Thailand was able to export its way out of recession through currency devaluation.

But it was different in 2009 as advanced economies could not import from Asia as they were trying to maintain their wealth through raising saving and subsequently reducing imports. Furthermore, appreciation of the baht made it difficult for Thai exporters to reap the benefit they once gained during the 1997 Asian financial crisis. During this episode many Asian scholars started questioning the Asian traditional model of growth, arguing that Asian countries should depend less on exports and pay more attention to the role of domestic demand.

Figure 1: Trend of Manufacturing Output, 1993-2011

4.85

4.80

4.75

4.70

4.65

4.60

4.55

4.50

94 96 98 00 02 04 06 08 10

LOG(MPI) TREND

Source: Bank of Thailand

Deviation from the long-term growth path can be viewed in Figure 2, where the boom and bust cycles are demonstrated. A mild recovery from the global financial crisis can be observed in 2010. We examine whether the expansionary policy contributed to this V-shaped recovery.

Figure 2: Deviation from trend growth path

OUTPUT DEVIATION

.06

.04

.02

.00

-.02

-.04

-.06

94 96 98 00 02 04 06 08 10

Figure 3: Global financial crisis and Thailand’s export slump

500,000

450,000

400,000

350,000

300,000

250,000

200,000

150,000

100,000

94 96 98 00 02 04 06 08 10

EXPORTS Trend of exports

Source: The Bank of Thailand

By the first half of 2010, it became clear that manufactured exports rebounded sharply. It is reckoned that the impact of global financial crisis has previously been overestimated. The robust growth of India and China generated strong export demand for goods from Thailand. Whether the export recovery can be sustained depends to a large extent on economic recovery in advanced countries. If developed economies experience a double-dip recession in the near future, developing countries must brace for another round of export contraction and they must increase volume of trade among themselves. The possibility of having a market substitution from advanced economies to emerging countries in Asia is limited, because a large part of the final demand for manufactured goods is originated from developed areas.

Even if there is a remote possibility of having a double-dip recession in developed economies, the important role of domestic demand must be emphasized. In particular, if domestic investment and consumption are weak as a result of uncertainties and pessimism, the government must act and stimulate the economy appropriately and efficiently. When the world economy recovers, public spending must return to its normal pattern observed the pre- global financial crisis. The collapse of exports in 2009 can be thought of as a temporary shock, the long-term output level should not be affected once exports return to its normalcy. As Figure 3 shows, the trend of exports has not yet returned to its trend growth path. Nevertheless, the long-term output growth remained unaffected by the declining trend of reduced exports.

It should be noted that exports and imports move together in the long run. Increased exports generate income, which in turn lead to higher demand for imports. In addition, manufactured exports require imported parts and components. The emerging pattern of infra-industry trade causes both imports and exports of manufactured goods move together. The reduction in exports gives rise to a fall in imports of raw materials; thus the impact of exports collapse on the current account is not severe. Even if exports collapse, the adverse impact on GDP will not be as much as the fall in exports because imports also decline. The implication is that governments should not take drastic fiscal measures to react to temporary export shortfalls, because the impact on GDP must be considered by the falling level of net exports rather than gross exports.

This paper addresses the role of fiscal policy whether it can be employed to stabilize the short-term fluctuations of output. It focuses on the relationship between fiscal and macroeconomic variables. Section 2 discusses the role of domestic demand and fiscal policy.

Section 3 highlights the importance of fiscal automatic stabilizers. Section 4 examines the rules for fiscal sustainability. Sector 5 analyzes the impact of fiscal expansion on growth and price stability. Concluding remarks are provided in the last section.

2. Domestic demand and fiscal measures

The movement of stock prices is a good indicator of investor confidence. It is obvious that the global financial crisis between 2007 and 2009 depressed market sentiment considerably. However, by the fourth quarter of 2010, the SET index has gained the lost ground since its peak in 2007. Confidence has returned and other stock markets in the region experienced the similar sharp rebound in the stock markets. Sales of automobiles reflect consumer confidence since the decision to buy durable goods is determined by similar factors that dictate the demand for physical investment. Expected or permanent income, the cost of capital, and fiscal incentives determine the desired level of capital stock. We can use the number of cars sold domestically as a proxy for consumer confidence. Both proxies for investor and consumer confidence, shown in Figure 4, move together during the downturn and upturn. The sluggish movement of the SET index in the early 2000s reflected poor sentiment during the mild recession in the US, when the bubble burst in the Wall Streets due to the dot-com share prices and the 911 incidence. These were not the factors affecting domestic consumer demand in Thailand as much as they were for the stock markets. The number of cars sold in Thailand thus continued increasing from 2000 to 2005, reflecting rising consumer confidence. After the military coup in 2006, subsequent political turmoil led to erosion of consumer and investor confidence. The global financial crisis took the severe blow on business and consumer confidence in 2008.

Figure 4: Consumer durable goods and asset prices

2,000

1,600

100,000

1,200

80,000

800

60,000

400

40,000 0

20,000

94 96 98 00 02 04 06 08 10

CARSALES (LHS) SET(RHS)

Source: Bank of Thailand
Table 1: Wealth effect on durable consumption
Pairwise Granger Causality Tests
Sample: 1993M01 2011M3 Lags: 5
Null Hypothesis:	Obs	F-Statistic	Prob.
D(SET) does not Granger Cause D(CARSALES)	213	2.30661	0.0458
D(CARSALES) does not Granger Cause D(SET)		1.14532	0.3377

Because of excess liquidity in the banking system, the low interest rate and ample bank credit were available to consumers and investors. Fiscal expansionary measures that give rise to public deficit would not create crowding-out effect. Fiscal stimulus undertaken during this period will be effective without having to depend on coordination of expansionary monetary policy.

It is argued here that fiscal policy will be more effective during the time that consumer and investor confidence is strong. On the other hand, when business sentiment is low,

expansionary impact of fiscal deficit will have minimal impact on the economy. The multiplier impact will be reduced if investors and consumer decide to postpone their investment until the period of uncertainly and risk has passed.

Figure 5: Business sentiment: 1993-2011

99 00 01 02 03 04 05 06 07 08 09 10 11

SENTIMENT TREND

Source: Business Sentiment Index, Bank of Thailand

Akerlof and Shiller (2009) extend the concept of Keynes’ animal spirits of investors to include confidence or self-fulfilling phenomenon, fairness, money illusions, criminal behavior, and stories that media tell them. With this extended definitions of animal spirits, the success of policy stimulus also depend on its psychological impact.

Fiscal stimulus at the period of the lowest level of confidence in 2008 would be relatively ineffective (Figure 5), compared to the period of normalcy. One might argue that budget deficit can help to improve the business confidence and therefore should be welcome during the recession. On the other hand, running a large budget deficit could lead to loss of confidence as the enlarging budget would further lead to huge public debt and the inevitability of a tax hike in the future. Whether running the budget deficit can lower and raise the business confidence depends on sustainability of public debt.

3. Automatic fiscal stabilizers

The primary budget (budget that excludes interest payments) is prone to be in surplus during the time when the economy is growing above its natural growth rate and tend to be deficit when it is declining below its natural level. Figure 5 illustrates the co-movement between the amount of value added tax and manufacturing output index. Thus budget deficit is a natural consequence of recession and so is the budget surplus during the boom. But the expenditure side of the budget must be counter-cyclical to make fiscal automatic stabilizer work.

By removing cyclical components from actual public spending and revenue, utilizing monthly data from January 1993 to December 2008, we can obtain the long-term trends of public expenditure and revenue. Using the first difference of these trend variables, we can find a pattern of fiscal stance which reflects the outcome from both discretionary fiscal policy and the automatic fiscal stabilizers (Figure 6).

Figure 6: Fiscal stance shown by structural budget

1500

1000

500

-500

1994 1996 1998 2000 2002 2004 2006 2008

change in trend spending change in trend revenue

Source: Bank of Thailand

The positive difference between changes in trend spending and trend revenue suggests fiscal expansionary policy stance. The large budget deficit in the late 1990s turned around into surplus in the 2000s. The deficit was sustainable because of the rapid increase in tax

revenues during the recovery and the ability to trim down public spending. Investment in infrastructure was postponed while tax capacity was enhanced. A sharp deterioration in fiscal position took place in 2009, but tax collection in 2010 was above the expected level. The automatic tax stabilizer is at work. In some countries, it is difficult to cut down budget deficit because of the inability to curtail public spending.

The structure of the spending matters for long-term growth. If a large part of government spending is on current rather than capital spending, it would be very difficult for the government to curtail total spending as it would affect social welfare of those who used to receive such benefits from the government. On the other hand, if the budget consists of a large portion of capital spending, it would be relatively easier for the government to cut down the deficit. Political economy involves here as current consumption includes military spending, health, education, and social welfare.

It is possible that high revenue leads to higher public spending and vice versa. If public goods are normal, rising GDP per capita would imply an increase in the demand for public goods. On the other hand, some governments may want to spend first by issuing bonds or printing money, but they have to raise taxes later. Thus the causation can run both ways between tax revenue and public spending.

Employing monthly data from January 1993 to March 2011 to examine whether taxation leads public spending or vice versa, we find that government spending does Granger cause taxation and vice versa (Table 2). The finding indicates that Thailand’s fiscal policy was conservative because spending was constrained by tax capacity. The reason behind this fiscal prudence is related to conservative budgetary laws of conservative fiscal policy.

Table 2
Pairwise Granger Causality Tests
Sample: 1993M01 2011M3 Lags: 2
Null Hypothesis:	Obs	F-Statistic	Prob.
D(GREV) does not Granger Cause D(GEXP)	216	3.79160	0.0241
D(GEXP) does not Granger Cause D(GREV)		4.44311	0.0129

Source: Calculation is based on 125 observations of data monthly data from January 1993 to March 2011.

The budgetary law states that the proposed amount of expenditure cannot exceed 20 % of anticipated revenue. One can argue that this rule would limit the size of fiscal stimulus during the period of economic depression, which requires very large fiscal stimulus. When all engine of growth are shut down, there is an urgent need to apply large fiscal deficit. However, relaxation of this rule would enable politicians to profligate the budget and employ populism policy for their own benefits. We have seen that the global economic recession is a temporary shock; therefore we should not amend fiscal rules for the benefit of the incumbent government.

It should be emphasized that fiscal stimulus can also be done through tax reduction in addition to increased spending. The impact on fiscal burden will be the same. In theory tax financed budget deficit is less expansionary than bond-financed budget deficit. If bonds are net wealth and wealth has a significant impact on private consumption, bond-financed budget deficit can lead to more expansionary impact when bonds holders start spending because they feel wealthier by holding more government bonds.

Discretionary policy can be delayed because of implementation lags caused by lengthy parliamentary process of budget approval. It is argued here that if a country has established fiscal automatic stabilizers, fiscal policy can be stabilizing and it does not have to depend on a long-delayed budgetary process. Let’s examine the role of automatic stabilizers in both taxation and expenditure when they change in response to changes in output and prices. Cointegration analysis indicates the existence of long-run relationship between fiscal variables, output, and the price level.

Table 3: Revenue and expenditure elasticities (Jan 1993-March 2011)

Normalized cointegrating coefficients (standard error in parentheses)

LOG(GREV)	LOG(MPI)	LOG(PRICE)
1.000000	-1.069934	0.369542
	(0.11029)	(0.23105)

Normalized cointegrating coefficients (standard error in parentheses)

LOG(GEXP)	LOG(MPI)	LOG(PRICE)
1.000000	-0.523711	-1.147858
	(0.14104)	(0.29576)

If fiscal policy can be employed for growth and price stability, we must recognize the feedback effects from growth and inflation to tax revenue and spending. Elasticities of expenditure and revenue can be calculated with respect to output and price levels from the normalized cointegrationg coefficients. As reported in Table 3, between 1993 and 2011, there was no statistical significant impact of changes in prices on government revenue, but public spending increased faster than the increase in the price level. Inflation caused an increase in budget deficit, given the constant level of output.

Fortunately inflation rate was subdued during this period. A small budget surplus was observed in 2006 (Figure 7). This was due mainly to political upheavals relating to changing governments that slowed down budget utilization. It turns out to be a blessing in disguise since it provided ample fiscal space prior to experiencing the global recession in subsequent years.

Figure 7:

2,000,000

Fiscal stimulus

2003 2004 2005 2006 2007 2008 2009 2010

1,500,000

million baht

1,000,000

500,000

Revenue Expenditures Budgetary deficit

Non-budgetary deficit Cash deficit

(500,000)

Source: Fiscal Policy Office

Public spending did respond to output and price levels (Table 3). On the revenue side, inflation did not significantly lead to lower tax revenue, while output growth raised it. The output elasticity is greater than one, implying that revenue rose faster than output1. This is a nice feature of automatic tax stabilizer during the course of economic expansion, because output expansion does not lead to an increase in public spending as fast as revenue collection. Consequently, fiscal stabilizers work on the revenue side; the budget becomes surplus during economic booms and deficit during economic slumps.

This finding also points out to an important policy implication; fiscal deficit tends to be destabilizing during high inflation. It is imperative that public spending must be controlled during high inflation to avoid giving more inflationary pressure to the economy. Inflation can be spiraling if the government wants to maintain the level of real spending during high inflation. The situation can become worse if the inflation is led by energy and food price inflation which produces output contraction.

4. Rules for fiscal sustainability

The budget deficit experienced after the financial meltdown in 1998 caused public debt on the rising trend (Figure 8). Economic contraction reduced tax revenue during the downturn. The continued budget deficit since 2007 raised the level of public debt. In addition, the government bailed out troubled financial institutions through Financial Institution Development Fund (FIDF), but this type of public debt has continued declining as financial institutions underwent structural changes and emerged stronger. They were not affected much by the global financial crisis of the period 2007 and 2009.

1 Mourmouras and Rangazas (2009) views that the relative size of government spending and taxation increases as an economy develops because of the structural transformation from traditional to modern production, rising public infrastructure investment, and less democratic governments in many of today's developing economies.

Figure 8:

Thousands

4000

Public Debt by Type (Million Baht)

3500

3000

2500

2000

1500

1000

500

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Government Borrowing SOE Debt FIDF Debt Others

Source: Fiscal Policy Office

If the primary deficit cannot be contained, public debt will keep on rising and would threaten the sustainability of the fiscal system. To stabilize debt-to-GDP ratio, the primary deficit must be cut and GDP growth rate must exceed the real rate of interest. Thus during economic recovery, the government must ensure that fiscal stimulus can bring about economic growth rate that is higher than the real interest rate.

Figure 9 illustrates that public debt per head of the Thais in 2008 rose to 50,000 Baht --a fivefold increase from the level in 1996. Since per capita income increased faster than the amount of debt, the level of debt per head as a percentage of per capita income peaked in 2002 has declined steadily.

Figure 9: Public debt burden

60000

50000

40000

30000

20000

10000

Public debt per head

30 (baht) LHS

Public Debt (% per

20 capita income) RHS

Source: Fiscal Policy Office

Because the level of per capita debt has been declining, the Thai government still has room to employ fiscal stimulus to counteract future impact of the global recession. This ample fiscal space is basically the result of fiscal discipline. There are at least three rules of fiscal sustainability that the Thai government observed in the past. Some of the rules have been changed to make more room for fiscal expansion. For example, the rule that regulates the level of public debt to GDP level was altered. It was made less stringent from the maximum level of 60% in 2002 to 50 % in 2004 and it was maintained at that level until 2008. To accommodate fiscal expansionary policy, the maximum debt was raised to 60% in 2009. The actual debt-GDP ratio increased substantially to 45.7 % in 2009, which was still below the original 50% ceiling. With the rapid recovery, there is no need for the government to make the rule less stringent. There has never been a single incidence of breaching this rule in the past. There was a historical reason for this conservative policy which went back for many decades. Aversion to hyperinflation and fear of foreign invasion were the reason for such conservative fiscal policy.

Figure 10

Regulation on Public Debt

60 60

55 54.0

% GDP

49.4

50 50 50 50 50

48.1

46.1

41.2

45.7

37.4 37.4

2002 2003 2004 2005 2006 2007 2008 2009

Debt Ceiling Actual Level

Source: Fiscal Policy Office

Since high debt causes a rapid rise in interest payments, another rule of fiscal sustainability was institutionalized by imposing ceiling on debt service as percentage of total planned expenditure. The ceiling was made more stringent after 2003 by lowering the maximum debt service from 16 %to 15% of total budget. Again the Thai government was able to control the debt service within the ceiling. The plentiful liquidity in the money market enabled the government to borrow at the very low rate of interests.

Another rule on foreign borrowing is worth mentioning. The debt-service ratio applies to foreign borrowing. In recent years, foreign borrowing declined while exports grew rapidly in the last decade. There is no problem in keeping the foreign debt-service to exports ratio within the permissible range.

Figure 11

Debt Service to Totol Proposed Spending

Percent

2002 2003 2004 2005 2006 2007 2008 2009

Max debt service/budget Actual Level

Source: Fiscal Policy Office

As mentioned earlier, fiscal spending structure matters for long-term growth. Public infrastructure can increase productivity in the private sector and enhance long-term growth. Public investment in transportation and communication has a super natural high rate of return to the economy. If public investment is complementary to private investment, increased public investment can lead to crowding-in-effect. In contrast, high public consumption relative to public investment can retard growth. Empirical evidence of cross-country investigation indicates that growth can be jeopardized if public consumption increases faster that public investment.

The rule of fiscal sustainability is concerned with this issue. It imposes a minimum level of public investment, requiring that it must not fall below 25 % of total budget. Since 2008 the budget allocated to public investment has fallen below the required level (Figure 12). If we take into account of depreciation of public capital stock, the net public investment would not be much higher than the break-even level of public investment. Consequently, the long-term growth of the Thai economy can be adversely affected2.

2 Akitoby and Stratmann (2008) examine the effect of fiscal policy on sovereign risk spreads in emerging markets. Financial markets also react to the composition of spending. Cuts in current spending lower spreads more than cuts in investment.

Figure 12

Public capital expenditure

(% total budget)

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

In the short-run, we will not see the impact of a slowdown in public investment. However, in the longer term, the tradeoff between present and future consumption will become apparent in terms of growth, efficiency, and international competitiveness. Fiscal sustainability is ensured if rules and regulations are strictly observed. The rules also give importance to long- term growth. Time inconsistency of fiscal policy is similar to the problem of monetary policy. In this case, both the government and people who are receiving the benefit of present consumption through populism programs of fiscal stimulus are happy, but in the long-run the fiscal policy that departs from the rule of adequate capital spending will retard growth3. Yakovlev (2007) provides empirical evidence that increased defense budget at the expense of budget for other development goals can be detrimental to economic growth.

5. Evaluation of the short-run impact of fiscal policy

Shocks by nature are random and temporary. Give it time; the economy can gravitate back to its natural output level. The speed of the adjustment back to the long-term growth path depends on the efficiency of the labor market as well as the flexibility of wage and price levels. In the short-run where rigidities exist, the economy achieves equilibrium but remain at

3 Using data on 42 developing countries from 1975 to 2001, Vergne (2009) finds the evidence that election-year public spending shifts towards more visible current expenditures, in particular wages and subsidies, and away from capital expenditures.

the output which corresponds to lower than the full employment of labor. Usually monetary policy is employed for short-term stabilization, while fiscal policy is a tool for long-term growth. But when the policy interest rate is close to zero, there is no room for further cut in the cost of borrowing. In addition, if the economy is subjected to pessimism, the low cost of fund would not encourage firms to expand their plant sizes.

During the global recession, fiscal policy was called upon to stimulate domestic demand during the period of ineffective monetary policy measures. It is important to emphasize that expansionary fiscal policy employed to counteract short-term fluctuations must be withdrawn after the economy is on its recovery path. If not, it can be a burden to the government and result in adverse impact on the economy. The risk and adverse consequences of withdrawal of fiscal spending consequences must be considered before implementing fiscal expansion in response to insufficient aggregate demand.

If the short-term expansionary impact of fiscal policy is large, then it would be appropriate to stimulate the economy using tax or public spending measures. But we also need to consider other alternative means of enhancing aggregate demand to make sure that fiscal policy is the most efficient tool of stabilization.

A Vector Autoregression model is used to evaluate the short-term impact of Thailand’s fiscal stimulus. The VAR model utilizes the monthly data from January 2000 to August 2010; it consists of seven variables: public spending (G), tax revenue (Tax), private investment (Invest), private consumption (Cons), Real Effective Exchange Rate (REER), Business Sentiment Index (BSI), and Core price index (CORE). All data are obtained from the Bank of Thailand. The BSI variable captures expectations of investors and consumers. As argued earlier, the effectiveness of fiscal and monetary policy depends on business and consumer confidence. The real exchange rate is included as it is affected by the domestic price level. The core consumer price index is used since it excludes exogenous factors such as prices of fresh food and energy. Private consumption is an index constructed by the Bank of Thailand. It includes spending activities involving imported consumer goods, households’ electricity usage, value added tax revenue, car sales and fuel consumption. The private investment index constructed by the Bank of Thailand includes activities in construction and capital formation, i.e., construction area permitted in municipal zones, imported capital goods, and domestic sales of machinery, cement, and commercial cars. Both private and consumption

indexes represent the domestic demand, which would be directly and indirectly affected by increased government spending.

The impulse response function of the impact on price stability is shown in Figure 13. The price level is positively related to output level as can be expected from the dynamic aggregate supply function. Price level increases in response to increased consumption more than an increase in public spending. A rise in investment does not cause inflationary pressure as much as other components of aggregate demand. Investment involves imported capital goods which is a leakage from the domestic economy. The fact that traded goods prices are exogenously determined by the world price level explains why an increase in domestic investment does not create inflationary pressure as much as domestic consumption and public spending. Furthermore, enlarged plant and equipment means higher output capacity which would by itself lower the upward pressure on the price level.

A tax hike initially raises the core inflation rate but the impact dissipates within two months when the contractionary impact takes effect. It is clear that taxation can lead to a slowdown in private consumption; thereby reducing the inflationary pressure. Therefore, fiscal policy can be used to stabilize the price level and it should be used to cool down inflationary pressure during the boom. An increase in public spending financed by tax increase has lower inflationary pressure than other methods of deficit financing. We now turn to analyze the impact of fiscal policy measures on output level.

The impulse response function reveals that the impact of fiscal policy stimulus has expected outcome: increased government spending leads to higher output, while increased tax revenues lead to output contraction (Figure 14). Fiscal stimulus through either reducing tax or increasing public spending can spur growth during the slowdown4. This expansionary impact dies off slowly within a year.

4 Libaˆnio (2009) views that it is misleading to treat growth as entirely determined by supply- side variables, since aggregate demand and output growth influences the trajectory of labor supply and productivity in the long run.

Figure 13: Impacts on price stability of various shocks

Response to Cholesky One S.D. Innovations ± 2 S.E.

-.1

Response of CORE to REER

2 4 6 8 10 12 14 16

-.1

Response of CORE to CONS

2 4 6 8 10 12 14 16

Response of CORE to INVEST

Response of CORE to G

-.1

2 4 6 8 10 12

14 16

-.1

2 4 6 8 10 12 14 16

Response of CORE to TAX

Response of CORE to OUTPUT

-.1

2 4 6

8 10

12 14 16

-.1

2 4 6 8 10 12 14 16

Figure 14: Expansionary impact of fiscal policy stimulus

Response of OUTPUT to Cholesky One S.D. Innovations

3.0

2.5

2.0

1.5

1.0

0.5

0.0

-0.5

-1.0

1 2 3 4 5 6 7 8 9 10

BSI

INVEST

REER G

CONS TAX

Output is also affected by the real exchange rate appreciation, but the contractionary impact becomes apparent only after six months. The government has some time to compensate the output contraction as a result of the loss of international competitiveness. In the real world where other factors are also changing, the contractionary impact of currency appreciated can be mitigated by other policy measures.

Fiscal and monetary policy instruments can be coordinated to achieve an optimal policy mix that can address the problem of losing international competitiveness. Fiscal incentives for investors such as tax incentives for investment and a temporary reduction in consumption tax can boost domestic demand. These measures are temporary by nature and should be withdrawn after export demand returns to its normal growth path.

Figure 14 shows that consumption has the highest expansionary impact on output—much larger than public spending. Thus any measures that enhance private consumption can ensure a fast recovery. The main factor attributing to the 2009 recession in Thailand is the loss of consumer confidence. The political turmoil and uncertainties give rise to pessimism (Figure 4) and a sharp decline in private consumption. Figure 14 confirms this conjecture. An

improvement in business confidence affects output trajectory. The expansionary impact of an optimistic view is even stronger than public spending. It is important therefore to nourish business sentiment, which can be obtained through establishing laws and order.

Good governance and the effective legal infrastructure are requirements for maintaining business sentiment. If the outcomes of legal disputes are envisaged as fair and logically justified, outcomes of judiciary process would not be unexpected. Thus the risks of unexpected outcome from legal institutions can be minimized. In time of crisis, if the government cannot maintain confidence in the private sector, a mild recession caused by a fall in export demand can lead to a severe depression. When consumers and investors postpone their spending, output would contract and magnify the fall in exports. Similarly a pickup in export demand can lead to a V-shaped recovery provided that consumer confidence is strong.

The growth collapse episode in Thailand is consistent with the observation that good political institutions help prolong growth spells. Growth decelerations are found to be associated with macroeconomic instability, conflict, and export collapses (Hausmann, Rodriguez, and Wagner, 2006). The military coup in September 2006 has derailed growth process in Thailand, confirming the hypothesis that growth is affected by democracy (Tavares and Wacziarg, 2001). Existing literature on the role of institutions on growth duration points to the relationship between sustained growth episode and distributional conflict and weak domestic institutions that cannot handle shocks (Berg and Sachs, 1998; Rodrik, Subramaninan and Trebbi, 2004). Poor institutions create economic and political turmoil which make countries more crisis-prone and growth more volatile. The success of fiscal policy undertaken to stimulate growth in the short-run and to promote long-term growth depends largely on the quality of institutions.

6. Concluding remarks

Fiscal policy can become an effective means to spur growth during the time when consumer and investor confidence remains strong. When business sentiment is low, expansionary impact of fiscal deficit will have minimal impact on the economy. The ability of legal institutions to maintain peace and withhold the rule of law is crucial for political stability.

Maintaining favorable business environment is important in preventing the propagation of global recession to severe economic contraction.

Thailand’s fiscal policy was conservative because spending was constrained by tax capacity. The reason behind this fiscal prudence is related to conservative budgetary laws. Debt-to- GDP is low, providing fiscal space for the government to counteract the future external shocks. Thailand has established fiscal automatic stabilizers from the revenue side rather than from expenditure. The discretionary fiscal expansion has some limitation. Moreover, fiscal policy employed to counteract short-term fluctuations must be withdrawn after the economy is on its solid recovery path. Otherwise, it can be a burden to the government and result in long-term growth. The risk and adverse consequences of withdrawal of fiscal spending must be considered before implementing fiscal expansion in response to insufficient aggregate demand.

Public spending must be controlled during high inflation to avoid fueling inflationary pressure. Inflation can be spiraling if the government insists on maintaining the level of real expenditure during the time of high inflation. Furthermore, structure of public expenditure matters for long-term growth. Rising share of current spending is detrimental to growth in the long run.

Continued fiscal deficits enlarge fiscal burden and raise public debt. But this burden can be minimized if the government succeeds in restoring consumer confidence and improve business sentiment. The finding of the paper indicates that there can be a less costly means of fiscal stimulus to achieve the same impact on growth.

References

Akerlof, G. A., and Shiller, R.J. (2009). Animal Spirits. Princeton, NJ: Princeton University Press

Akitoby, B. and T. Stratmann (2008) "Fiscal Policy and Financial Markets." The Economic Journal 118(533) 1971-1985.

Alesina, A. and Perotti, R. (1996) “Fiscal discipline and the budget process,” American Economic Review, 86(2), 401-406.

Berg, A. and Sachs, J. D. (1988) “The debt crisis: Structural explanations of country performance,” Journal of Development Economics, 29(3), 27-306.

Hausmann, R., Rodriguez, F., and Wagner, R. (2006) “Growth Collapses,” Working Paper No. 136, (April) Cambridge, Mass: Center for International Development.

Libaˆnio, Gilberto A. ( 2009) “Aggregate demand and the endogeneity of the natural rate of growth: evidence from Latin American economies, Cambridge Journal of Economics 33, 967–984

Mourmouras, Alexandros and Rangazas, Peter (2009) “Fiscal Policy and Economic Development” Macroeconomic Dynamics, 13(4), 450-76

Rodrik, D., Subramaninan A., and Trebbi, F. (2004) “Institution rule: The primacy of institutions over geography and integration in economic development” Journal of Economic Growth, 9(2), 131-65.

Tavares, J. and Wacziarg, R. (2001) “How democracy affects growth” European Economic Review, 45(8), 134-78.

Vergne, Clemence (2009) “Democracy, Elections and Allocation of Public Expenditures in Developing Countries” European Journal of Political Economy, 25(1), 63-77

Yakovlev, P. (2007) “Arms trade. Military spending and economic growth,” Defense and Peace Economics, 18(4), August, 317–338.

DRAFT ONLY, NOT FOR QUOTATION

THE EFFECTS OF GOVERNMENT SPENDING ON OUTPUT IN VIET NAM1

Vu Quoc Huy

University of Economics and Business Viet Nam National University

Paper presented at Bangkok Policy Forum

Macroeconomic Policy Strategy for Cambodia, Laos, Thailand, and Vietnam The Thailand Research Fund in collaboration with Faculty of Political Science Faculty of Economics, and Faculty of Commerce and Accounting

Thammasat University, Bangkok 19-20 May 2011

1 I am grateful to the Thai Research Fund to support this study. My thanks also go to Iris Claus, Anwar Nasution and other participants of the Asian Economic Panel Conference in Tokyo, September 2010 for their valuable comments and suggestions. Discussions with participants of Siem Reap workshop in October 2010 and comments from an anonymous referee are extremely useful. All remaining errors are mine.

Introduction

The effects of fiscal policy has been a controversial topic with competing views and mixed empirical evidence. For a long time, using VAR model to assess the effects of fiscal policy was not as popular as for monetary policy. In recent years, however, there has been a growing body of literature using structural VAR model for fiscal policy effects assessment. Most of the literature on the effectiveness of fiscal policy has been written in an advanced economy context, although most of the theoretical discussions and arguments can carry over to a developing country setting. There is a view that developing country economic activity is more likely influenced by supply- shocks to it that leaves fewer opportunities to use fiscal policy for demand management. Nevertheless, there has been also growing number of studies applying this SVAR method for economies in transitions as well as for developing countries and provide interesting results. This paper represents an attempt to make a quantitative assessment of the effects of the government spending in Viet Nam using a structural VAR model.

The paper is organized as follows. Section 1 provides a brief literature review, documenting recent development in using structural VAR for assessing the effects of fiscal policy. Section 2 presents a summary of key steps in identifying and constructing a SVAR model. Section 3 shows data sources and variable construction. Key time-series tests are presented in this Section. Section 4 shows preliminary results of applying this method to examining the effects of government spending in Viet Nam on output, using quarterly data from 2000:1. These results show that the government spending has a rather limited and quickly fading effect on the industrial output. Moreover, the government spending has different effects on state-owned and the private sector. While the response of the state-owned sector to the government spending is far more positive and long-lasting, that of the private sector is rather limited and negative. The results also show that government spending composition matters as long as its effects on output and price concerned.

1. A brief literature review

There have been a growing number of studies on the effects of fiscal policy in recent years using structural VAR model. Based on Blanchard and Perotti (2002) work, a number of studies were taken to examine the effects of fiscal policy on the economy using more or less an uniform approach of a structural VAR. Table 1 summaries some these studies.

Heppke-Falk, Tenhofen and Wolff (2006), for example using a structural VAR model with 5 variables to study the effects of fiscal policy in Germany from 1974:1-2004:1 have found that a government expenditure shock triggers an output increase, boosts private consumption but not private investment. On the other hand, they found that government investment has stronger effects on macroeconomic activity than government personnel expenditure, while indirect tax shocks seem to have weaker effects than direct tax shocks. Fernández and Hernández de Cos, (2006) in a similar 5-variable SVAR study on Spain, using quarterly data from 1980Q1 to 2004Q4 have come to a conclusion that increases in government expenditure have a positive impact on economic growth in the short term, but the effect turns negative in the longer term. Both government expenditure and net tax increases generate public deficits in the medium term but they have opposite impact on the price level and output. The government expenditure shocks lead to increase in price level while net-tax increases trigger a negative short-term price response. Finally, these authors conclude that the responses of GDP or prices are found to differ significantly depending on the spending or tax component considered. In another study using similar approach to the case of Pakistan, Shaheen and Turner (2008) find similar conclusions for fiscal policy impact for Pakistan. These authors nevertheless show some weakness of the SVAR approach, arguing that the results obtained from a SVAR model may lose their accuracy over longer horizons and should be treated with caution. The structural VAR approach was also used to analyze fiscal policy effects in some middle-income and developing countries. Restrepo and Rincón (2006) for example apply this model to Chile and Columbia; Štiková (2006) uses this model for Czech Republic. The results obtained from these studies also sensible and these authors believe that the SVAR approach can be considered as a good tool for assessing fiscal policy effects.

Table 1 Summary of features of the fiscal SVAR literature.

Paper	Variables used	Identification method	Country	Sample period
Blanchard and Perotti (2002)	Taxation per capita, government spending per capita, output per capita	Variable order based on institutional events	US	1974Q1- 1997Q4
Perotti (2002)	Taxation per capita, government spending per capita, output per capita, inflation, short term interest rate		US, UK, West Germany, Canada, Australia	vary
Claus et al (2006)	Taxation per capita, government spending per capita, output per capita	As Blanchard and Perotti (2002)	NZ	1982Q3- 2004Q3
Favero and Giavazzi (2007)	GDP per capita, GDP deflator, government expenditure per capita, taxation per capita, debt		US	1960Q1- 2006Q2
Chung and Leeper (2007)	Output, GDP deflator, short term interest rate, long term interest rate, money base, taxation, government spending, debt		US	1947Q2- 2006Q2
Rezk, Avramovich and Basso (2006).	current public expenditure (PE), tax revenues (TR), gross domestic product (GDP), unemployment (UNE) and inflation (INFL) rates.		Argentina	1984Q1- 2005Q2
R.Giordano, S. Momigliano, S. Neri and R. Perotti, (200x).			Italy
Restrepo and Rincón, (2006).	net taxes, government spending on wages, goods and services and investment, and real GDP.		Chile and Colombia	1990Q1- 2005Q2
Štiková (2006)	real GDP, government spending, government revenue, change in net CPI and three month PRIBOR		Czech Republic	1996Q1- 2006Q1
Heppke-Falk, Tenhofen and Wolff, (2006)	real GDP, GDP-deflator, nominal short-term interest rate, real government direct expenditure and real government net revenue		Germany	1974Q1- 2004Q4
Shaheen and Turner (2006)	public expenditure, net taxes, GDP in real terms, consumer price index and interest rate of government bonds		Pakistan	1973Q1- 2008Q4
Fernández and Hernández de Cos, (2006).	Public expenditure, net taxes, GDP in real terms, GDP deflator and three-year interest rate of government bonds		Spain	1980Q1- 2004Q4
Rarytska, O. (2003)	Government expenditures, government revenues, total output and price level		Ukraine	1998M8- 2002M3

Source : Adapted from Mardi Dungey and Renée A. Fry (2007) and updated by the author

2. Model specification

Following Blanchard and Perotti (2002), Heppke-Falk, Tenhofen and Wolff (2006) and Fernández and Hernández de Cos (2006) and many others, I will use a four-variable structural VAR model to analyze the effects of government spending and taxes on output and price in Viet Nam during the last decade.

The standard reduced form VAR model is:

Xt = B(L)Xt–1 + Ut

Where Xt is the vector of variables; B(L) is an autoregressive lag polynomial and Ut is the reduced form innovation. Four variables which are used in this model are total industrial output, price index, government revenue and government total expenditures. The reason for using total industrial output instead of GDP is simply that the former is available while the latter is made published only from 2004:4 so the time span is not long enough for modeling. Attempt to interpolate to get quarterly GDP data from the annual ones proves to be undesirable as pointed by Shaheen and Turner (2008), for example.

Following Perotti et al. (2005), we identify the fiscal shocks by imposing contemporaneous restrictions on the vectors Ut, in order to derive a vector of ‘structural’ fiscal shocks, which are orthogonal to each other and to the variables of the model. The formal representation of this structural VAR is as follows:

AUt = BEt

where the shocks Et are independent and identically distributed with covariance matrix equal to one.

In this four-variable model, only two fiscal shocks associated with two fiscal variables are

considered. They are er: government revenues/taxes shock and eg: government spending shocks.

t t

ur = αryuy + αrπuπ + βreg + er

t t t g t t

ug = αgyuy + αgπuπ + βger + eg

t t t r t t

According to Perotti (2005) these equations reflect three components: the structural policy shocks, which are uncorrelated with each other and with all other structural shocks in the economy; the automatic response of net taxes and government spending to innovations in output and price and finally the systematic discretionary response of policymakers to output and price.

We define cyclically-adjusted (CA) fiscal shocks as follows

ur,CA ؝ ur — (αtyuy + αtπuπ)= βreg + er

t t t t g t t

ug,CA ؝ uy — (αgyuy + αgπuπ)= βgeg + er

t t t t r t t

In the next Section we will describe what data we use for this model

Identification Strategy and Estimation Procedure

Perotti (2002; 2005 and 2006) applied a four-step estimation procedure for structural VAR model. This four-step procedure is used by most studies that use the Blanchard and Perotti’s approach to assess the effects of fiscal policy. The procedure can be briefly described as follows:

Step1. Establishing a formal representation of the reduced form residuals from the standard VAR model to establish relationship between these residuals and structural shocks to government revenues/taxes and expenditure. Recall that the formal representation of the standard VAR model with 2 fiscal variables has the following form:

ur = αryuy + αrπuπ + βreg + er

t t t g t t

ug = αgyuy + αgπuπ + βger + eg

t t t r t t

where et and eg are the structural shocks to the government taxes and expenditures, respectively.

t t

Since the reduced form residuals u are correlated with structural shocks e, it is not possible to estimate this formal representation. So it needs a new approach which is reflected in Step 2.

Step2. Estimating cyclically adjusted (CA) reduced form of fiscal shocks using

external/exogenous elasticities. The cyclically adjusted (CA) residuals ur,CA and ug,CA of

t t

government revenues and government expenditures are computed by the following formula:

ur,CA ؝ urt — (αryuy + αrπuπ)= βreg + er

t t t t g t t

ug,CA ؝ uy — (αgyuy + αgπuπ)= βger + eg

t t t t r t t

All coefficients αrπ, αry, αgπ and αgy are obtained from external sources or can be

estimated outside from this VAR model, but using the same database. The computed cyclically adjusted (CA) residuals ut,CA and ug,CA are then considered as inputs to estimate two coefficients

t t

βr and βg in the next step

g r

Step 3. Estimating structural shocks βr and βg .

g r

It is not possible to estimate both βr and βg with limited information from computed ur,CA

g r t

and ug,CA as obtained in Step 2. Here is a crucial assumption about the ordering of structural shocks of fiscal variables. Setting βr = 0 means that tax decision comes first, where setting βg=

g r

0 means the spending decision prevails. We follow Perotti (2005, 2006) and many others to suggest that spending decision comes first. A Grange causality test, presented later in this paper tends to support this decision. In this case, βr can be estimated by OLS in the following equation:

ur,CA = er

t t

ug,CA = βrer + eg

t g t t

Step 4. Estimating the rest of the VAR model

In this step, the remaining equation for other macroeconomic variables is estimated using the previous information. In our four-variable model setting, there are two remaining equations with four coefficients to be estimated. They are as follows:

uy = αyrur + αygug + ey

t t t t

uπ = απyuy + απrur + απgug + eπ

t t t t t

As Perotti et al. (2005) these two equations can be estimated by OLS method using the previously

estimated series of er* and eg* as instruments for ur and ug

t t t t

The result of this four-step estimation procedure allows construct the matrix A and matrix B of the structural VAR model and now we have the system as

F 1 0 — αyr —αyg l y

1 0 0 0 y

F l t

I— α

1 — α

— α I J π ۊ

I0 1 0 0I J π ۊ

I πy

πr πgI lut l I

I let l

Au = I

—α —α

1 0 I l

l= Bu = I I l l

8 0 0 1 0 g

I gy gπ

I lut l I

I I

I let l

L —αry —αrπ 0 1 ⎦ hur l

L0 0 βg 1⎦ her l

t r t

When this structural VAR is estimated and identified, we can get impulse responses to evaluate dynamic effects of a structural shock.

Exogenous Elasticity Estimation

As studies show the results of structural VAR model depend on different assumptions on the system and its parameters. Estimation of core coefficients underlying the formal representation of the model therefore is crucial for the results. While a uniform method of estimation is generally applied for those coefficients that can be estimated within the system, , exogenous or external elasticities are derived from different sources and different methods are applied depending mostly on available information and some institutional knowledge (Perotti et al. (2006) and Heppke-Falk, Tenhofen and Wolff, (2006)). Table 2 summaries some of these approach. Most authors use a simple OLS regression with different lags when internal data are used. Very few used error-correction model for this purpose. Robustness check and sensitivity analysis, however have been quite common to check the final results.

Table 2 Summary of features of the fiscal SVAR literature.

Paper	Variables used	Elasticity estimation	Country
R.Giordano, S. Momigliano, S. Neri and R. Perotti, (2005).		Using external estimates	Italy
Restrepo and Rincón, (2006).	net taxes, government spending on wages, goods and services and investment, and real GDP.	Using time-series regression for contemporaneous effects	Chile and Colombia
Štiková (2006)	real GDP, government spending, government revenue, change in net CPI and three month PRIBOR	Combine both time-series regression and external estimates	Czech Republic
Heppke-Falk, Tenhofen and Wolff, (2006)	real GDP, GDP-deflator, nominal short-term interest rate, real government direct expenditure and real government net revenue	Combine both time-series regression and external estimates	Germany
Shaheen and Turner (2006)	public expenditure, net taxes, GDP in real terms, consumer price index and interest rate of government bonds		Pakistan
Fernández and Hernández de Cos, (2006).	Public expenditure, net taxes, GDP in real terms, GDP deflator and three-year interest rate of government bonds	Combine both time-series regression and external estimates	Spain
Rarytska, O. (2003)	Government expenditures, government revenues, total output and price level	Using internal information for regression	Ukraine

Source: Author’s summary.

In this paper, we apply a simple regression to derive these needed elasticities. In the future, these results need to be checked with other sources (which is, unfortunately very scarce) or different methods. Table 2 provides these estimates for different variables.

3. Source of data and variable construction

For the structural VAR model, the availability of quarter data of key variable, including fiscal is crucial. That explains a lot why most of studies on this area were mainly focused on developed countries (Perotti et al, 2004). Until recently, this area of research starts to penetrate to other countries, including some developing economics thank to emerging of new data. In some cases, interpolation of lower-frequencies data is used to obtain needed quarterly data for model use, but this approach may cause some problems. In the case of Viet Nam, when traditionally data availability is really a scarce resource for research and economic decision-making, new improvement has been shown in recent years including that in the government finance area. From 1997, the Government committed to release publicly government budget data as a part of its financial transparence commitments. Since then, quarterly government finance data have been available for wider public. The data reliability and consistency are still in question but their availability is a good improvement and makes it possible to apply some modeling techniques to evaluate policy. The length of data is far from desirable but with 42 observations, something can be done for policy analysis.

The structure and development of government budget in Viet Nam

While there are many difference remained in the definition and operational applications of various terms in the government budget between Viet Nam and other countries, I will use the same definition for government spending and taxes as in these reference studies. Therefore, in this paper the government expenditure is defined as total purchases of goods and services. In the Vietnamese budget specification that would include two items: government capital expenditure and government current expenditure. As in other cases interest payment is excluded from government spending.

On the revenue side, two items are excluded from ‘government taxes’. These are receipts from oils (both as transfers from state-owned companies and as taxes, including corporate income tax and natural resources taxes. The reason of excluding these receipts from the government revenues is that they are not responsive to any domestic economic conditions. Viet Nam has no refine facility so it has to export all crude oil. Oil revenues depend solely on the external environment so

including them into the government revenues would mislead some of impact on output and price that we are interested in. For a similar reasons, official development assistance (ODA) is also excluded from the revenues because it is considered as transfer. For the fiscal policy analysis purposes, it may be more complicated because, some of ODA are considered as ‘budget-support items’ so they have the same role as other items. For a similar reasons, official development assistance (ODA) is also excluded from the revenues because it is considered as transfer. For the fiscal policy analysis purposes, it may be more complicated because, some of ODA are considered as ‘budget-support items’

Table 1-3 show data of government budget from 2000 to 2009 with break-down for both revenues and expenditures. On the revenue side, taxes account for nearly 90 percent of total revenue, but income taxes, including both corporate income and personal income account for around 40 percent of total taxes. A sharp drop in the share of income tax in 2009 is due to tax- break initiated by the Government as a counter-measure to the economic slowdown as a result of the global recession. At the same time, personal income account for a negligible share in total tax collection. As Kojo Oduro (2007) rightly puts it ‘around 74 percent of Vietnamese pay no tax at all’. Import duties tax also lost its relevance in the total government revenues. This is partly because of tariff liberalization efforts, implemented intensively in recent years as Viet Nam engaged in many regional and bilateral trade and investment arrangements.

On the expenditure side, capital expenditure includes two key items: government spending on public investment on infrastructure and supporting state-own enterprises. That explains why the share of capital expenditure still remains significant (almost one-third of total). It is also expected that the state sector can benefit a lot from the government spending. Concerning the current expenditure, most of it is in form of wage to the state employee, other targeted programs. It should be noted that under the current system of fiscal decentralization, part of central government budget is given to provinces for their own need of spending. Of total 64 provinces in Viet Nam, 48 provinces get net transfers from the central budget.

One of the prominent features of the Vietnamese fiscal system is that there is strong role of the government in providing budget resources for public investment and development finance and supporting state-owned enterprise.

Financing the budget deficit and macroeconomic stability issue

One of intensively debated issues in Viet Nam recently is the macroeconomic stability and related to this the issues of the effectiveness of government spending and its sustainability in particular. Using ICOR (Incremental Capital Output Ratio) as a measure of the effectiveness of investment and government spending, many argue that this ratio exhibits a continuing upward trend in the last two decades. Vuong Quan Hoang (2009) for example shows that the ICOR for the whole economy has increased from as low as 3.05 in the period of 1991-1995 to as high as 8.0 in 2009. More importantly, there is evidence that the state sector has much higher ICOR that the national average (Nguyen Phi Lan, 2010). Many relate this seemingly inefficient use of resources to ineffective government spending via public investment and other targeted programs. As a result, the government budget deficit tends to widen as shown in Table 3a. In the last five years, especially during the global financial crisis, the government budget deficit tends to widen further, exceeding a 5-percent limit set by the National Assembly. Widening the government budget deficit has a profound implication to the macroeconomic stability for the Viet Nam economy for many reasons. Firstly, it increase the burden of national debt which may became a real issue in the near term (Vu Thanh Tu Anh, 2010). Secondly, both ways of financing the deficit, e.g. via domestic or foreign borrowing will have serious consequences for the economy in the context of Viet Nam. Domestic financing often lead to monetizing the deficit even in the case of initially selling the government treasure bonds to the public or to commercial banks. On the other hand, foreign borrowing will expose the economy on increasing risk of exchange rate fluctuation as evidenced in recent years. Both exchange rate and inflation induced by deficit financing represents a significant risk for the economy’s macroeconomic stability.

Industrial output

In this paper, we don’t use GDP as a variable in the model because of the absence of the data before 2004. Today the Government publishes quarterly data on GDP, but before 2004, only annual data on GDP is available. Interpolation of annual data to get quarterly data may cause some problems as pointed out by Shaheen and Turner (2008). Instead, data on industrial gross output has been published regularly with monthly frequency and with quite detailed break-down to different sectors by ownership, for example. Therefore, in this model, we use industrial output not GDP data.

As previously mentioned, in Viet Nam, there is still strong presence of the state sector in the economy and with this a heavy budget support (directly or indirectly) to the sector. In this context, it is important to examine the effects of the government spending on each sector: the state and the private separately. Therefore, there is also a need to disaggregate the total industrial output into these components. Later on these disaggregated data will be used in different model options.

Data transformation and analysis

In this study we will use the following key variables

• TOTAL: total industrial output produced in a given quarter

• SOE: industrial output produced by the state sector

• PRIVATE: industrial output produced by the private sector as a whole

• TOT_REV : total budget revenues

• TOTEXPEND: total government spending

• CAPITAL: total government capital expenditures

• CURRENT: total government current expenditures, and

• CPIINDEX: price index

In total, there are seven variables divided into four groups of indicators in our model. These groups include output (includes TOTAL, SOE and PRIVATE); price (CPIINDEX); government revenues (TOT_REV) and government spending (TOTEXPEND, CAPITAL and CURRENT). Not all these variables will be used simultaneously in a model. Instead, in each option only four variables, one from each group will be included into the model. For example in the basic model, we use for variables TOTAL, TOEEXPEND, TO_REV and CPIINDEX to analyze the effects of total government spending on total industrial output. In another case, only government capital spending CAPITAL is used to analyze the effects of this particular kind of government spending on the total output. Similarly, in another setting, when the effect on the state-sector output is in focus, variable SOE will be used instead of TOTAL.

Data transformation.

It is evident that data are heavily affected by seasonal fluctuations. These fluctuations are caused by both technical and institutional factors and applied to not only production and price data but to even greater extend to the government budget data. Under the current budget planning and implementation in Viet Nam, it is often the case that resources are quickly disbursed at the end of a financial year to fulfill target growth rate and become slowly channeled to designated

users at the beginning of a planning period. Figure 1 shows this pattern for all components of the government spending. On the production side, seasonality is also highly visible as shown the left panel of Figure 1.

Figure 1. Seasonality of key variables

200000

160000

120000

80000

40000 40000

00 01 02 03 04 05 06 07 08 09

SOE TOTAL PRIVATE

CAPITAL CURRENT TOTEXPEND

Therefore it is needed to adjust the original data to capture this time-series features of the data. A standard TRAMO/SEATS procedure has been used to all variables in the model. Figures show the original and seasonally adjusted data for CAPITAL, CURRENT, TOTAL and TOTAL_REV as an example. In each panel, three data sets: the original, seasonally adjusted and the trend-cycle data are shown for each corresponding variable. In our study, seasonally adjusted data will be used instead of the original one.

Figure2. Seasonally adjusted data for CAPITAL and CURRENT

120000

100000

80000

60000

40000

120000

100000

80000

60000

40000

20000

00 01 02 03 04 05 06 07

08 09

00 01 02 03 04 05 06 07 08 09

Final seasonally adjusted series CAPITAL

Final trend-cycle

Final seasonally adjusted series Final trend-cycle

CURRENT

Figure 3. Seasonally adjusted data for TOTAL and TOTAL_REV

200000 140000

160000

120000

100000

120000

80000

60000

40000

20000

40000

00 01 02 03 04 05 06 07 08 09

TOTAL

Final seasonally adjusted series Final trend-cycle

TOT_REV

Final seasonally adjusted series Final trend-cycle

Unit Root and Stationarity Test.

We perform both unit root and Grange-causality test for all variables in the model. The results are given in Table xx and xx. We consider four options for unit root test for each variable. These options are: (i) level without trend; (ii) level with trend; (iii) 1-st difference without trend and (iv)1-st difference trend. It is shown that all variables, except the price level become stationary after de-trending. Some are I(1) as Table 3 shows. The same pattern of stationarity is reserved after data transformation into seasonally adjusted data

Table 3: Unit root test for key variables: the original data

	Level without trend		Level with trend		1-st difference without trend		1-st difference with trend
Variable	T-statistics	P-value	T-statistics	P-value	T-statistics	P-value	T-statistics	P- value
TOTAL	1.680	0.999	-6.742	0.000	-3.394	0.066	-7.291	0.000
SOE	-1.191	0.669	-7.867	0.000	-6.446	0.000	-7.785	0.000
PRIVATE	-0.091	0.944	-8.312	0.000	-3.013	0.141	-8.329	0.000
TOT_REV	-2.220	0.202	-5.774	0.000	-4.560	0.004	-5.668	0.000
TOTEXPEND	3.111	1.000	-7.711	0.000	-0.469	0.980	-5.129	0.001
CAPITAL	0.762	0.992	-15.736	0.000	-1.434	0.834	-15.856	0.000
CURRENT	0.307	0.976	-6.589	0.000	-4.992	0.001	-5.463	0.000
CPIINDEX	2.356	1.000	-1.963	0.301	1.102	1.000	-3.629	0.043

Source: Author’s calculation

Table 4: Unit root test for key variables: seasonally adjusted data

	Level without trend		Level with trend		1-st difference without trend		1-st difference with trend
Variable	T-statistics	P-value	T-statistics	P-value	T-statistics	P-value	T-statistics	P- value
TOTAL	2.093	1.000	-5.759	0.000	-2.158	0.500	-6.315	0.000
SOE	-0.988	0.748	-7.627	0.000	-4.531	0.004	-7.560	0.000
PRIVATE	0.109	0.963	-9.829	0.000	-3.290	0.082	-9.784	0.000
TOT_REV	-0.858	0.792	-5.317	0.000	-3.676	0.038	-5.191	0.001
TOTEXPEND	2.171	1.000	-6.263	0.000	-4.360	0.007	-4.355	0.008
CAPITAL	2.724	1.000	-8.527	0.000	-6.756	0.000	-4.913	0.002
CURRENT	0.002	0.953	-6.977	0.000	-4.352	0.007	-6.870	0.000
CPIINDEX	3.385	1.000	0.541	0.986	2.244	1.000	-4.940	0.002

Source: Author’s calculation

Granger-Causality Test

So the tests show that the price level does Grange-cause the output but not the reserve. On the other hand, both government budget items (spending and revenues) do Grange-cause the price level. Finally, output and price do Grange cause the expenditure. Most of the tests which are given in Table 5 are statistically significant at least at the 5% level. For example, Table 5 shows that the price level CPIINDEX does statistically Grange cause the total industrial output at 4% level of significance (chi-square equals to 10.272). Similarly, in its turns the price level is Grange caused by two government budget variables, TOT_REV and TOTEXPEND at 2.1 percent of significance. Both total industrial output TOTAL and the price level CPIINDEX do Grange cause the total spending (Table 5). It can also be seen that spending does Grange cause revenues but not the opposite. These results remain robust with regards to number of lags included in the test.

Table 5. Grange Causality Test.

Variables	TOTAL		CPIINDEX		TOT_REV		TOTEXPEND
Variables	Chi-sq	P-value	Chi-sq	P-value	Chi-sq	P-value	Chi-sq	P-value
TOTAL			4.210	0.378	5.158	0.271	26.234	0.000
CPIINDEX	10.272	0.036			3.687	0.450	10.551	0.032
TOT_REV	3.831	0.429	48.509	0.000			1.297	0.862
TOTEXPEND	3.939	0.414	11.523	0.021	11.460	0.022

All	21.908	0.039	90.288	0.000	25.288	0.014	38.043	0.000

Source: Author’s calculation

It should be noted that although this Grange causality test with respect to spending/taxation relationship seems to support our assumption on the these Grange causality results should not be mixed up with our assumptions made on contemporaneous effects of stochastic shocks on a given macroeconomic variable in the structural VAR model. The Grange causality tests involve the effects of past values of a variable on another, so they deal with delayed effects rather than the contemporaneous effects as in the SVAR set-up.

4. Preliminary findings and follow-up

The standard benchmark VAR model

Two panels in Figure 4 show the accumulated effects of the output (TOTAL) and price (CPIINDEX) to other government budget shocks. It can be seen that the total spending has a limited, short-lived long-term effects on the output. The accumulated effect reaches its peaks in 3 quarters and after that start to decline and eventually become negative. The same patterns are applied for the price and government revenues shocks albeit with shorter positive-accumulated reaches it peaks and eventually become negative in real terms in shorter time span.

Figure 4.The accumulated responses of output and price to the government spending and revenues

Accumulated Response of LOG_TOTAL to Cholesky One S.D. Innovations

.08

Accumulated Response of LOG_CPIINDEX to Cholesky One S.D. Innovations

.025

.06 .020

.04 .015

.02 .010

.00 .005

-.02 .000

-.04

1 2 3 4 5 6 7 8 9 10

-.005

1 2 3 4 5 6 7 8 9 10

LOG_TOTAL

LOG_CPIINDEX

LOG_TOTEXPEND LOG_TOT_REV

LOG_TOTAL

LOG_CPIINDEX

LOG_TOTEXPEND LOG_TOT_REV

On the other hand, all other shocks, including output and government budget shocks have rather strong and permanent inflationary impact as shown in the right panel of Figure xx, although the impact of the government spending is diminishing over time.

Figure 5. The accumulated responses of output and price to the government capital spending and revenues

.01

Accumulated Response of LOG_TOTAL to Cholesky One S.D. Innovations

.020

Accumulated Response of LOG_CPIINDEX to Cholesky One S.D. Innovations

.00 .016

-.01 .012

-.02 .008

-.03

.004

-.04

.000

-.05

1 2 3 4 5 6 7 8 9 10

-.004

1 2 3 4 5 6 7 8 9 10

LOG_CPIINDEX LOG_CAPITAL LOG_TOT_REV

LOG_TOTAL LOG_CAPITAL LOG_TOT_REV

Figure 5 show similar results of the effects of government capital spending on output and price. It is surprising to know that the accumulated effects of capital spending on the output exhibits a cyclical pattern: It has a negative effects on the first 3 quarters and become positive in the subsequent quarter before going back to the negative interval, albeit with lower magnitude again. On the other hand, capital spending has a negative inflationary impact which is difficult to explain.

The effects of the government current spending on output and price are shown in Figure 6. The patterns of effects of government current spending mirror the effects of the overall spending. Again, the current expenditure has short-lived positive effects at the beginning but quickly turn into negative effects over time. Furthermore, although the current spending has initial disinflationary effect, over time it has accelerated inflationary effect. (Figure 6).

Figure 6. The accumulated responses of output and price to the government current spending and revenues

.016

Accumulated Response of LOG_CPIINDEX to Cholesky One S.D. Innovations

.01

Accumulated Response of LOG_TOTAL to Cholesky One S.D. Innovations

.012

.00

.008

.004

.000

-.01

-.02

-.03

-.04

-.004

1 2 3 4 5 6 7 8 9 10

-.05

1 2 3 4 5 6 7 8 9 10

LOG_TOTAL LOG_CURRENT LOG_TOT_REV

LOG_CPIINDEX LOG_CURRENT LOG_TOT_REV

The effects of government spending on output in the private and state-owned sector.

Although the private sector in Viet Nam has been experiencing an impressive growth in the last decade, the state sector still plays an important role in the economy. Support from the budget to the state sector no longer has its direct from as it was in the past. Nevertheless, the state sector still enjoys many forms of support from the government. Capital expenditure, for example often goes to the state-owned or –dominant companies and business groups. In this context, it is interesting to see how government budget has any distinguished effects on different ownership group, e.g. the state and the private sector. We undertake this test by replacing the total output by the state sector and the private sector output respectively in different options of the benchmark model. Figure 7 gives results of these model options

Figure 7. The accumulated responses of output by ownership to the government total spending and revenues

.08

.06

.04

.02

.00

-.02

-.04

Accumulated Response of LOG_PRIVATE to Cholesky One S.D. Innovations

.12

.10

.08

.06

.04

.02

.00

Accumulated Response of LOG_SOE to Cholesky One S.D. Innovations

.02

.00

-.02

-.04

-.06

-.08

Accumulated Response of LOG_TOTAL to Cholesky One S.D. Innovations

-.06

1 2 3 4 5 6 7 8 9 10

-.02

1 2 3 4 5 6 7 8 9 10

-.10

1 2 3 4 5 6 7 8 9 10

LOG_CPIINDEX LOG_TOTEXPEND LOG_TOT_REV

As can be seen from Figure 7 the effects on different sectors seem to be greatly different. The private sector seems to get positive effects of the government spending but bearing the cost of taxation, while the FDI sector tend to get all the burdens of the government spending

Figure 8. The accumulated responses of output by the state and non-state sectors to the government total spending and revenues

.12

.10

.08

.06

.04

.02

.00

Accumulated Response of LOG_TOTAL to Cholesky One S.D. Innovations

.02

.00

-.02

-.04

-.06

-.08

Accumulated Response of LOG_NONSTATE to Cholesky One S.D. Innovations

-.02

1 2 3 4 5 6 7 8 9 10

-.10

1 2 3 4 5 6 7 8 9 10

LOG_CPIINDEX LOG_TOTEXPEND LOG_TOT_REV

The effects of government spending on industrial output breakdown by ownership become more visible when outputs of the private and foreign direct investment (FDI) are combined together to form the non-state sector input and put into comparison with the state sector. Figure 8-10 give the effects of government spending to the output of these two sectors. There is a great contrast between the state and non-state sector output responses to price and government total spending shocks as shown in Figure 8. The SOE sector responds highly positive to the government spending and revenue shocks while the private sector has rather negative effects. Decomposition of total government spending into capital and current expenditures give a better picture to the non-state sector as shown in Figure 10.

So we observe an evidence crowding-out effects when government spending tends to expand the state sector output but contracts the non-state sector at the same time. A similar result was found by Hemming et al (200x) and they explained that this crowding-out may take place because either government provision substitutes for private provision or fiscal expansion leads to an interest rates rise which in turn negatively affect the private investment. This explanation can be used to the case of total government spending but can hardly be used to explain a overall negative effects of capital expenditure shocks as shown in Figure 9.The crowding-out effect result therefore needs to be taken with caution and its robustness should be checked.

Figure 9. The accumulated responses of output by the state and non-state sectors to the government’s Capital Spending and Total Revenues Shocks

.02

.00

-.02

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Accumulated Response of LOG_NONSTATE to Cholesky One S.D. Innovations

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.12

.08

.04

.00

-.04

Accumulated Response of LOG_TOTAL to Cholesky One S.D. Innovations

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LOG_CPIINDEX LOG_CAPITAL LOG_TOT_REV

LOG_CP INDEX LOG_CAPITAL LOG_TOT_REV

Figure 10. The accumulated responses of output by the state and non-state sectors to the government current spending and revenues

.04

Accumulated Response of LOG_NONSATE to Cholesky One S.D. Innovations

.12

Accumulated Response of LOG_TOTAL to Cholesky One S.D. Innovations

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.08

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-.08

.04

-.12

.00

-.16

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LOG_CPIINDEX LOG_CURRENT LOG_TOT_REV

One possibility for the model robustness check is to use external data for exogenous elasticity estimation, for example. Including more variables, interest rate for instance into the model is another option but with this small sample it can hardly be a viable choice.

5. Conclusion

A structural VAR model has been used to explore the effects of government spending on output and price in Viet Nam. The model has provided some sensible result. It shows, for example, government spending has rather limited effect on output while it inflationary impact is prominent. The results provide evidence on possible crowding out and different patterns of effects by different components of the government spending. While these results need careful interpretation, the model nevertheless has shown that it could be a good tool to be used for assessing the effects of fiscal policy.

Table 1. Government spending structure, 2000-2009 (billion VND)

Year	Total spending	Capital expenditures	Current exp (incl. interest payment)	Current exp (excl. interest payment)	Interest payment	Share of capital exp in total (%)
2000	99751	29624	70127	66613	3514	29.7
2001	117285	40236	77049	72564	4485	34.3
2002	129434	45218	84216	78886	5330	34.9
2003	162150	59629	102521	96126	6395	36.8
2004	187353	66115	121238	114021	7217	35.3
2005	229092	79199	149893	143272	6621	34.6
2006	268409	88341	180068	172103	7965	32.9
2007	336312	104302	276483	232010	12666	31.0
2008	433222	135911	297311	281834	15477	31.4
2009	527342	179961	347381	323501	23880	34.1

Source: Ministry of Finance, 2010

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