The Causality Between Exchange Rate, Public Debt and Trade Balance

Abstract

     This paper aims to test the causality between exchange rate, public debt and trade balance for the evidence of Lao PDR using the Vector Autoregressive model and Granger causality test. The time series data from 1998 – 2021 was used. The VAR model reveals that exchange rate and public debt significantly impact trade balance, with a 1% and 5% level of statistical significance, respectively. The previous of the exchange rate has a positive effect and align with the setting hypothesis. As the results, a 1% increase in exchange rate volatility led to a 0.863% increase in trade balance. The previous year's public debt significantly impacted trade balance by 5%, indicating that a 1% increase in public debt leads to a 0.994% increase in trade balance. Furthermore, the study indicates that previous exchange rate volatility negatively impacts public debt by a significant level of 1%, indicating that an increase in this volatility would result in a 1.22% decrease in public debt.
     The results of the Granger causality between public debt and the trade balance there is a unidirectional causal relationship between the variables meaning that there is a one-way causality runs through public debt to the trade balance, but the trade balance does not cause public debt. Otherwise, it is evidence from the results that there is also one-way causality runs through the exchange rate to public debt and the trade balance, but not through public debt and the trade balance to the exchange rate or public debt and the trade balance does not cause the exchange rate volatility
 
Article history: Received 19 February 2024   
                            Revised 10 June 2024
                            Accepted 13 June 2024    
                            SIMILARITY INDEX = 0.00%