Spill-Over Effect of Fiscal Policy between Vietnam and Its Trading Partners

Spill-Over Effect of Fiscal Policy between Vietnam
and Its Trading Partners
Nguyen Hoang Thuy Bich Tram
Nguyen Thi Lien Hoa
University of Economics Ho Chi Minh city, Vietnam
Abstract
The paper researches about the fiscal policy transmission between Vietnam and its trading partner
countries in the period 1995-2016. The paper applies the global vector auto-regression model (GVAR) on the
Vietnam's major trading partners such as China, South Korea, Taiwan, Australia, Singapore, the United States,
Japan, Thailand, Indonesia, Malaysia, and Philippines to clarify the interdependence between these economics
and Vietnam. The research has found that the increase in government spending in the US will reduce
household consumption and output in Vietnam. So, it has confirmed the existence of beggar-thy-neighbour
effect, when considering the United States and Vietnam. However, there is the impact of increasing the
economic benefits in Vietnam, when considering Singapore and Vietnam. It is called prosper-thy-neighbour
effect. Other countries have not enough evidences to conclude.
Keywords: beggar-thy-neighbour, fiscal policy transmission.
1. Introduction
When economies open and integrate with the rest of the world through international trade and capital
flows shift, then the shock stemmed from a country that is passed on to other countries through various
channels. The cross-border impact of domestic fiscal activities is a widespread concept among policy makers,
scholars and international organizations such as the International Monetary Fund.
As we know, to deal with the global crisis, the expansionary fiscal policy has been used as a powerful tool
for stability in the countries all over the world. Therein, the policy maker has enhanced government spending,
delaying debt aimed at stimulating demand in the world which has been gradually declining. Then, raising a
concern that the fiscal expansion measures in a country that have the ability to spill over other countries. It
can bring positive impacts or worsen the policy objectives which the countries are pursuing. This implies that,
some countries would benefit from the political decisions and the difficulty of other countries. Moreover,
whether that belief of those policymakers is in line with the predictions of the theory and empirical evidence?
However, currently, the evidence of the international spill-over of fiscal policy in country-level is very few,
especially in Vietnam. Furthermore, quantitative studies based on the typical model for the prediction of crossborder effect is also rather less. This paper will contribute an empirical evidence regarding estimating the spillover effect of fiscal shock on trading partner countries to Vietnam.
Today, in the context of the extensive integration of the global economy, Vietnam has joined the world's

economic institutions and signed several agreements related to trade liberalization. This has put Vietnam in
the playground of the world, influenced more from its trading partner countries. To meet the integration
process, Vietnam policies are constantly changing in the direction of adapting and responding before the
effects of other countries.

491


Hence, the need of assessing the influence of fiscal policy in the countries having trade relation with
Vietnam's economy is essential, help policy makers give the right decisions to achieve the stable development
purpose of the economy. This research considers the fiscal policy transmission channels from countries having
trade relations with Vietnam to clarify the policy dependence between them. So, it not only contribute to the
theoretical research related to fiscal policy, but also help leaders, organization investors, policy makers add
the new perspective on regulatory tools for emerging economies in practices.
The paper researches the fiscal policy transmission between Vietnam and its trading partner countries in
the period 1995-2016. Vietnam's major trading partners, including China, South Korea, Taiwan, Australia,
Singapore, the United States, Japan, Thailand, Indonesia, Malaysia, the Philippines will clarify the
interdependence between these economies. These trading partners are expected to be representative of the
entire trade relations in Vietnam because total import-export turnover with these countries account for more
than 70% of the total import-export turnover of Vietnam. The paper will focus on answering the following
questions whether there are spill-over effects of fiscal policy between Vietnam and its trading partners and
which transmission channels they are expressed through.
The paper is divided into four sections. The first section will present literature review. The second section
is methodology. Section 3 will show the research results and discussion. The final section will give the
conclusion and implication.
2. Literature review
Corsetti and Pesenti (2001) has developed the earlier researches such as Corsetti, Meier, Muller (2010),
Reinhart (1988), Frenkel và Razin (1987), Mundell – Fleming (1968, 1962). This study shows that a long-term
fiscal shock from the host country will contribute to the world government expenditure, which creates the
increased of demand and output in the host country. This impact cause of the price of the host country

increased. Therefore, an increase in term of trade in the host country implies that the domestic market are
buying less foreign goods. Because real wages adjusted decrease in the host country, so, rising output in the
long term is lower than the initial increase of government spending in the host country. Moreover, household
consumption in the world is all reduced because of the increase in price in both domestic and foreign. This
happens because the host country mostly spend on domestic goods rather than foreign goods. Therefore, if
the foreign currency is depreciated, it will reduced the purchasing power of foreign goods, then reduce real
wages and the real money supply and worsen the world consumption. So the fiscal policy in the host country
will bring up negative impact on other countries. It is called beggar-thy-neighbour effect. The transmission
channels are relative prices and the term of trade expressed by the real effective exchange rate. However, the
negative impact on foreign consumption and production can be smaller if the tradable goods between these
countries are complementary. It can impact on foreign prices in other directions.
Corsetti and Müller (2011) has said that, during the global financial crisis 2007-2009, fiscal policy has been
widely used as a tool of economic stability. Policy makers have to use expansionary fiscal policy that increases
public debt. At the same time, the call for regulating the policies have emphasized that the international spillover effects of fiscal policy can be very large. Therefore, the author gave a new proof of the cross-border impact
of discretionary fiscal policy based on the VAR model facilities and quantitative economic cycle models. Their
research focuses on America with its trading partners European area and England. They show that when the
ratio of government expenditure on GDP grows up to 1% in the United States, it will the increase output up
to 0.5% in Europe and 1% in the UK. This effect lasts for 2 years and the dollar is depreciated against the
currency of trade partners. They find the existence of pervasive spill-over effect. The impact of financial factors
is stronger than the commercial elements in the international transmission mechanism of fiscal policy. This
result is pointed out by two-country business cycle model.

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Nicar (2015) has estimated the impact of US government spending and taxation in Canada and England.
The shock of spending and taxes is determined by using sign restriction vector auto-regression model. The
author has found that the impact of fiscal expansion are not the same between the countries. It increases the
GDP in all three countries in the short term. In addition, the shock of government expenditure still has greater
impact than the shock of tax. These results support the view of that a number of countries could benefit from

the fiscal expansion of America.
Nickel and Vansteenkiste (2011) studied the transmission of fiscal shocks on the financial variables. The
author has used the quarterly data in 8 countries: France, Germany, Italy, Spain, Sweden, the UK, Japan and
the United States of America from 1980Q1-2008Q4. The research results showed that the issued government
bonds by the US and Germany benefit from the loosened fiscal policies in other countries. Because these
countries are considered a safe haven.
Dias et al (2012) has applied SVAR method to evaluate international interdependence for the two cases: the
first case study between Argentina and the European Community (EU) and the second case study between
Brazil and the EU. This analysis has emphasized the impact of the shock of long-term fiscal policy of increasing
the world government expenditure on consumption and domestic production in Brazil and Argentina. Concur
with Corsetti and Pesenti (2001), the case of Argentina and the European Community confirmed the negative
effect of world fiscal policy on output and consumption in Argentina. For the Brazilian economy, the results
do not confirm the beggar-thy-neighbour effect of the shock of the EU fiscal policy on Brazil's production and
consumption. The results are the same with Dias and McDermott (2004), when considering Brazil and the US.
We haven’t yet found an in depth research about the fiscal policy transmission in the context of
international integration. The current studies mainly focus on associating fiscal policy with monetary policy
primarily to create a favourable environment for business, or to help Vietnam regain growth momentum,
control economic decline, curb inflation, and reduce the balance of payments deficit in Vietnam. Meanwhile,
the spill-over effect from foreign fiscal policy, especially from trading partner countries, are still open.
Therefore, the paper researches on fiscal policy transmission from Vietnam’s trading partner countries, which
are expected to contribute to the theory about the interdependence between countries, make the international
fiscal policy transmission channels be clearer and bring important macro policy implications.
3. Methodology and data
The paper applied the Global Vector Autoregressive Model (GVAR) of Dees, di Mauro, Pesaran and Smith
(2007) to assess the spill-over effects from Vietnam’s trading partner countries. GVAR models have
incorporated the error correction model of individual countries into the global framework and allows for the
interdependence between countries. The model of each country is linked to the rest of the world through the
presence of foreign characteristic variables, therefore, a shock in one country can spread to the rest of the
world.
Suppose there are N + 1 countries in the global economy, is denoted by i = 0, 1, 2,…., N, in which country

0 has the relationship with the rest of the global. Each country i is set up VARX* model as follows, assuming
that all variables are lagged 1:
∗
𝑥𝑖𝑡 = 𝛿𝑖0 + 𝛿𝑖1 𝑡 + Φ𝑖 𝑥𝑖𝑡−1 + Λ𝑖0 𝑥𝑖𝑡∗ + Λ𝑖1 𝑥𝑖𝑡−1
+ Γ𝑖0 𝑑𝑡 + Γ𝑖1 𝑑𝑡−1 + 𝜀𝑖𝑡
Where:
xit are the domestic characteristic variables of country i. xit* are the foreign characteristic variables of
country i. dt is the global variables, assumed to be exogenous for the global economy as the oil price variable.
The foreign variables are constructed through the proportion of bilateral trade between countries to
understand the relative importance of each trading partner countries. The GVAR model in this study includes
Vietnam and eleven trading partner countries with Vietnam, accounting for nearly seventy percent of

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Vietnam's total trade value in 2015. So, this model has the twelve VAR models for each country on the
condition that the foreign variables of each country and the global factor are weakly exogenous form, denoted
VARX*. The foreign variables are calculated by taking the weighted average of the equivalent variables for
each country. That is:
𝑁

𝑥𝑖𝑡∗ = ∑ 𝜔𝑖𝑗 𝑥𝑗𝑡
𝐽=0

In particular, ωij is the trading proportion with country j in the total export and import value of country i;
𝜔𝑖𝑖 = 0, ∀𝑖 = 0, 1, 2, … , 𝑁 và ∑𝑁
𝑗=0 𝜔𝑖𝑗 = 1, ∀𝑖, 𝑗 = 0, 1, 2, … , 𝑁.
VARX* model can be written as error correction form VECMX* as follows:
∗
∆𝑥𝑖𝑡 = 𝑐𝑖0 + 𝜑𝑖 𝐸𝐶𝑀𝑖,𝑡−1 + Λ𝑖0 Δ𝑥𝑖𝑡∗ + Λ𝑖1 Δ𝑥𝑖𝑡−1

+ 𝜇𝑖𝑡
𝐸𝐶𝑀𝑖,𝑡−1 is the error correction coefficients, represents the co-integration relationship between xit, xit and
xit*, xit and xjt when i ≠ j, in the model of country i.
Therefore, GVAR model allows the interaction between the different economies through three separate
∗
channels: the contemporaneous dependence of 𝑥𝑖𝑡 on 𝑥𝑖𝑡∗ and 𝑥𝑖𝑡−𝑚
; the dependence of domestic variables on
the exogenous global variables 𝑑𝑡 ; the simultaneous dependence of the shock of country i on country j,
measured by the cross-covariance ∑𝑖𝑗 .
The contribution of Corsetti and Pesenti (2001) improved those previous studies, especially, considering
the impact of fiscal policy on trading partner countries in the open new macroeconomic model. In particular,
the economic distortion is expressed through the national power impact on the term of trade by manipulating
the supply of products, which is combined in the model. Therefore, Corsetti and Pesenti (2001) provided a
new theory framework of the fiscal transmission between trading partner countries. The application of this
theoretical model will provide the best understanding relating to Vietnam's fiscal policy and recognize total
negative impacts from the trading partner countries of Vietnam.
According to Corsetti and Pesenti (2001), long-term household spending is dependent on government
spending. Therefore, Vietnamese consumption is affected by the fiscal policy in its trading partner countries
which is shown in model 1 as below, assuming lag 1 for all variables:
∗
𝑔𝑜𝑖𝑡
𝑔𝑜𝑖𝑡−1
𝑔𝑜 ∗
𝑔𝑜𝑖𝑡−1
[ ℎ𝑜 ] = 𝛿𝑖0 + 𝛿𝑖1 𝑡 + Φ𝑖 [ ℎ𝑜
] + Λ𝑖0 [ 𝑖𝑡
] + Γ𝑖0 𝑝𝑜𝑖𝑙𝑡 + Γ𝑖1 𝑝𝑜𝑖𝑙𝑡−1 + 𝜀𝑖𝑡
∗ ] + Λ 𝑖1 [
∗
ℎ𝑜𝑖𝑡

ℎ𝑜𝑖𝑡−1
𝑖𝑡
𝑖𝑡−1
The impact of world fiscal policy on Vietnamese output is shown in model 2 as follows, assuming lag 1 for
all variables:
𝑔𝑜𝑖𝑡
𝑔𝑜𝑖𝑡−1
𝑔𝑜 ∗
𝑔𝑜 ∗
[𝑦𝑦 ] = 𝛿𝑖0 + 𝛿𝑖1 𝑡 + Φ𝑖 [𝑦𝑦
] + Λ𝑖0 [ 𝑖𝑡∗ ] + Λ𝑖1 [ 𝑖𝑡−1
] + Γ𝑖0 𝑝𝑜𝑖𝑙𝑡 + Γ𝑖1 𝑝𝑜𝑖𝑙𝑡−1 + 𝜀𝑖𝑡
∗
𝑦𝑦𝑖𝑡
𝑦𝑦𝑖𝑡−1
𝑖𝑡
𝑖𝑡−1
The research also clarifies the interdependence between the local currency purchasing power and the fiscal
policy in Vietnam’s trading partner countries. Therefore, the impact of world fiscal policy on the real money
balance of Vietnam is expressed in model 3, assuming lag 1 for all variables:
𝑔𝑜𝑖𝑡
𝑔𝑜𝑖𝑡−1
𝑔𝑜 ∗
𝑔𝑜 ∗
[𝑚𝑚 ] = 𝛿𝑖0 + 𝛿𝑖1 𝑡 + Φ𝑖 [𝑚𝑚
] + Λ𝑖0 [ 𝑖𝑡∗ ] + Λ𝑖1 [ 𝑖𝑡−1
] + Γ𝑖0 𝑝𝑜𝑖𝑙𝑡 + Γ𝑖1 𝑝𝑜𝑖𝑙𝑡−1 + 𝜀𝑖𝑡
∗
𝑚𝑚𝑖𝑡
𝑚𝑚𝑖𝑡−1

𝑖𝑡
𝑖𝑡−1
Term of trade is expressed through multilateral real exchange rates to consider the relative price between
trading partners. Based on the model of Corsetti and Pesenti (2001), the impact of world fiscal policy on
Vietnam’s real exchange rate is expressed in model 4, assuming lag 1 for all variable:
𝑔𝑜𝑖𝑡
𝑔𝑜𝑖𝑡−1
𝑔𝑜 ∗
𝑔𝑜 ∗
[ 𝑡𝑡 ] = 𝛿𝑖0 + 𝛿𝑖1 𝑡 + Φ𝑖 [ 𝑡𝑡
] + Λ𝑖0 [ ∗𝑖𝑡 ] + Λ𝑖1 [ ∗𝑖𝑡−1 ] + Γ𝑖0 𝑝𝑜𝑖𝑙𝑡 + Γ𝑖1 𝑝𝑜𝑖𝑙𝑡−1 + 𝜀𝑖𝑡
𝑡𝑡𝑖𝑡
𝑡𝑡𝑖𝑡−1
𝑖𝑡
𝑖𝑡−1
The impact of world fiscal policy on domestic prices is showed in model 5, assuming lag 1 for all variables:
∗
𝑔𝑜𝑖𝑡∗
𝑔𝑜𝑖𝑡−1
𝑔𝑜𝑖𝑡
𝑔𝑜𝑖𝑡−1
∗
∗
[𝑚𝑜𝑖𝑡 ] = 𝛿𝑖0 + 𝛿𝑖1 𝑡 + Φ𝑖 [𝑚𝑜𝑖𝑡−1 ] + Λ𝑖0 [𝑚𝑜𝑖𝑡 ] + Λ𝑖1 [𝑚𝑜𝑖𝑡−1
] + Γ𝑖0 𝑝𝑜𝑖𝑙𝑡 + Γ𝑖1 𝑝𝑜𝑖𝑙𝑡−1 + 𝜀𝑖𝑡
∗
∗
𝑝𝑟𝑖𝑡
𝑝𝑟𝑖𝑡−1
𝑝𝑟𝑖𝑡

𝑝𝑟𝑖𝑡−1
Where:

494


go is the domestic government expenditure growth rate, ho is domestic household consumption growth
rate, yy is the output growth rate, mm is real money balance growth rate, tt is term of trade, mo is money
supply growth rate, pr is domestic price growth rate.
Data
The research collects a dataset from 1995Q2 to 2016Q4 for 12 countries, including Australia, China,
Indonesia, Japan, South Korea, Malaysia, Philippines, Singapore, Taiwan, Thailand, The United States of
America and Vietnam. Most variables are sourced from the IMF, except that the world oil price variable is
collected from the Datastream and variable data rates of multilateral real exchange rate variable is collected
from European economic organization Bruegel. All variables were removed seasonality.
Particularly, Vietnam and China only have annual datasets. Government expenditure (go), household
expenditure (ho) and the total domestic output (gdp) data are only reported by year. Therefore, the paper
applies univariate decomposition techniques combined multivariable adjustment method which European
General Statistics Office often uses to estimate the quarterly components of GDP and GDP by expenditure
approach.
The matrix of trade (wij) for the foreign variables is calculated by taking the sum of exports and imports
between countries i and j divided by the total export of the country i with all of your trading partners. The
paper uses fixed matrix from the average figures of 3 years 2014-2016, collected from the IMF's trade statistics.
The result table is shown as below:
Table 1: The matrix of trade
Austrailia

China

Indonesia

Japan

Korea

Malaysia

Philippines

Singapore

Taiwan

Thailand

USA

Vietnam

0

0.06

0.04

0.06

0.05

0.05

0.01

0.04

0.03

0.05

0.03

0.02

China

0.39

0

0.22

0.33

0.38

0.18

0.20

0.20

0.34

0.24

0.48

0.29

Indonesia

0.03

0.03

0

0.04

0.03

0.06

0.04

0.11

0.02

0.06

0.02

0.02

Japan

0.17

0.16

0.16

0

0.13

0.13

0.20

0.08

0.16

0.20

0.16

0.13

Korea

0.08

0.15

0.08

0.09

0

0.06

0.08

0.08

0.07

0.04

0.09

0.16

Malaysia

0.04

0.05

0.07

0.04

0.03

0

0.05

0.17

0.04

0.08

0.04

0.04

Philippines

0.01

0.02

0.02

0.02

0.02

0.02

0

0.03

0.03

0.03

0.02

0.01

Singapore

0.05

0.04

0.16

0.03

0.04

0.19

0.09

0

0.07

0.06

0.04

0.04

Taiwan

0.03

0.10

0.03

0.07

0.05

0.06

0.08

0.09

0

0.04

0.05

0.06

Thailand

0.05

0.04

0.07

0.06

0.02

0.09

0.07

0.05

0.03

0

0.03

0.05

USA

0.12

0.29

0.11

0.23

0.19

0.13

0.16

0.13

0.17

0.14

0

0.18

Vietnam

0.02

0.05

0.03

0.03

0.06

0.04

0.02

0.04

0.03

0.05

0.04

0

Australia

4. Results and discussion
4.1. Unit root test
ADF test results indicate that the hypothesis H0 cannot be rejected. It means that all variables are integrated
level 1. WS test results also shows all the variables have unit root. According to Leybourne et al (2005), unit
root test WS is more powerful than traditional ADF test. The unit test results show that all variables in the
model are I(0)/I(1), in accordance with the assumptions of the model.

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Table 2: The results of unit root test at significance level 5%
Austrailia
go

I(0)

go*

I(1)

ho

I(0)

ho*

I(0)

yy

I(0)

yy*

I(0)

mm

I(0)

mm*

I(0)

tt

I(0)

tt*

I(0)

mo

I(0)

mo*

I(0)

pr

I(0)

pr*

I(0)

China

Indonesia

Japan

Korea

Malaysia

Philippines

Singapore

Taiwan

Thailand

USA

Vietnam

I(0)

I(0)

I(0)

I(0)

I(0)

I(0)

I(0)

I(0)

I(0)

I(0)

I(1)

I(0)

I(0)

I(0)

I(0)

I(0)

I(0)

I(0)

I(0)

I(0)

I(1)

I(0)

I(0)

I(0)

I(0)

I(0)

I(0)

I(0)

I(0)

I(0)

I(0)

I(0)

I(1)

I(0)

I(0)

I(0)

I(0)

I(0)

I(0)

I(0)

I(0)

I(0)

I(1)

I(0)

I(1)

I(0)

I(0)

I(0)

I(0)

I(0)

I(0)

I(0)

I(0)

I(0)

I(1)

I(0)

I(0)

I(0)

I(0)

I(0)

I(0)

I(0)

I(0)

I(0)

I(0)

I(0)

I(0)

I(0)

I(1)

I(0)

I(0)

I(0)

I(0)

I(0)

I(0)

I(0)

I(0)

I(0)

I(0)

I(0)

I(0)

I(0)

I(0)

I(0)

I(0)

I(0)

I(0)

I(0)

I(0)

I(0)

I(0)

I(0)

I(0)

I(0)

I(0)

I(0)

I(0)

I(0)

I(0)

I(0)

I(0)

I(0)

I(0)

I(0)

I(0)

I(0)

I(0)

I(0)

I(0)

I(0)

I(0)

I(0)

I(1)

I(0)

I(0)

I(0)

I(0)

I(0)

I(0)

I(0)

I(0)

I(0)

I(0)

I(0)

I(0)

I(0)

I(0)

I(0)

I(0)

I(0)

I(0)

I(0)

I(0)

I(0)

I(0)

I(0)

I(0)

I(0)

I(0)

I(0)

I(0)

I(0)

I(0)

I(0)

I(0)

I(0)

I(0)

I(0)

I(0)

I(0)

I(0)

I(0)

I(0)

I(0)

poil

I(0)

4.2. The fiscal transmission from trading partners to Vietnam
Next, the paper will use the GIRFs to analyse the dynamic effects of the simulated shocks on Vietnam: (1)
the shock of one standard deviation increase in trading partners’ government expenditure to Vietnamese
households consumption, (2) the shock of one standard deviation increase in trading partners’ government
expenditure to Vietnamese output, (3) the shock of one standard deviation increase in trading partners’
government expenditure to Vietnamese real money balance, (4) the shock of one standard deviation increase
in trading partners’ government expenditure to Vietnamese term of trade, (5) the shock of one standard
deviation increase in trading partners’ government expenditure to domestic prices. The simulation will
determine the level of international spill-overs.
2.1 The effect of the world fiscal policies on Vietnamese household consumption
The graph of general impulse response functions (GIRFs) shows the response of each variable in the period
of 40 quarters to express the convergence of the shock. The graphs include confidence intervals 95%
significance level, are calculated based on the bootstrap technique, but we just focus the results of 8 first
quarters, because it is the proper time for thinking about macro fluctuations.
Table 3: The GIRFs of household consumption in Vietnam from its trading partners
Countries
Australia

China
Indonesia
Japan
Korea
Malaysia
Philippines
Singapore
Taiwan
Thailand
USA

Fiscal policy shock from
trading partners (+1σ)
1.14%
0.28%
5.11%
0.49%
1%
4.35%
3.01%
5.7%
1.69%
2.75%
2.18%

Vietnamese household consumption growth rate after
1 year
2 years
-0.016%
-0.023%

0.082%
0.049%
-0.006%
-0.02%
0.016%
0.018%
-0.00033%
0.004%
0.028%
0.019%
-0.032%
-0.005%
-0.025%
-0.009%
-0.023%
-0.01%
0.008%
0.0003%
-0.034%
-0.015%

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Table 3 shows that a shock which government expenditure increases one standard deviation in Australia,
Indonesia, Philippines, Singapore, Taiwan and U.S, cause to reduce Vietnamese household consumption after
2 years. They create beggar-thy-neighbour in Vietnam.
Based on Corsetti and Pesenti (2001) about the economic interdependence, we can explain this
phenomenon as follows: growing government spending in these countries, causes to increase aggregate
demand in the world, lead to increase foreign price and wage, so, the price of imported goods increased for

Vietnamese people, raising the domestic price. After that, term of trade is reduced in Vietnam that decreases
the purchasing power in domestic country. The relative price level increase makes domestic households
consume less and export more. However, the permanent shock could cause a Vietnamese household
consumption decrease. Considering fiscal policy shock in Australia, Indonesia, the Philippines, Singapore,
Taiwan, USA, it confirms the effect of "beggar-thy-neighbour", would reduce Vietnamese household
consumption. But, there are also cases, increase household spending, causing the effect Vietnam "prosper-thyneighbour" when considering countries China, Japan, Korea, Malaysia, and Thailand.
4.3. The effect of the world fiscal policies on Vietnamese output
Table 4: The GIRFs of output in Vietnam from its trading partners
Countries
Australia
China
Indonesia
Japan
Korea
Malaysia
Philippines
Singapore
Taiwan
Thailand
USA

Fiscal policy shock from trading partners (+1σ)
1.14%
0.28%
4.6%
0.51%
0.97%
4.56%
3.85%
5.51%

1.84%
2.79%
2.21%

Vietnamese output growth rate after
1 year
2 years
0.00019%
-0.00072%
0.09%
0.033%
0.003%
0.008%
-0.011%
-0.028%
-0.014%
-0.01%
-0.0048%
-0.0049%
0.017%
0.057%
-0.002%
0.003%
-0.018%
-0.014%
0.008%
-0.008%
-0.01%
-0.007%

Table 4 shows that the shock of increasing government expenditure in Australia, USA and Taiwan will
make the growth rate of Vietnamese economy fall in the long term. So, the effect "beggar-thy-neighbour" of
the world fiscal policy have been confirmed with regard to Vietnamese output growth rate. As indicated in
the theory model of Corsetti and Pesenti, the shock of fiscal expansion would make the foreign price higher
which increases the foreign demand for Vietnamese tradable goods. These effects may increase the foreign
demand for Vietnamese tradable goods, but decrease domestic household consumption. The proportion of
household consumption is higher than the ratio of tradable goods, which makes domestic output decrease in
the long term.
In case of Japan, Korea, Malaysia, Thailand, they make household consumption increase, but cause output
to decrease in Vietnam. Maybe, the reason is that Vietnam mainly consume imported goods from them. In
contrast, the effect "prosper-thy-neighbour" is confirmed when considering between Vietnam and China.
In case of Indonesia, Philippines, Singapore, despite of reducing domestic household consumption,
Vietnamese production still increases, because the goods between Vietnam and these countries is
complementary which increases foreign demand for Vietnamese goods. Therefore, they have "prosper-thyneighbour" effects.

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4.4. The effect of the world fiscal policies on Vietnamese real money balance
Table 5: The GIRFs of real money balance in Vietnam from its trading partners
Countries

Australia
China
Indonesia
Japan
Korea
Malaysia
Philippines
Singapore

Taiwan
Thailand
USA

Fiscal policy shock from trading partners
(+1σ)
1.17%
0.28%
5.23%
0.46%
1.28%
4.43%
3.02%
5.94%
1.78%
2.66%
2.18%

Vietnamese real money balance growth rate
after:
1 year
2 years
0.017%
0.011%
-0.36%
-0.398%
0.025%
-0.008%
-0.012%
-0.018%

0.12%
0.104%
-0.017%
-0.011%
0.025%
0.021%
-0.003%
-0.001%
0.03%
0.01%
-0.017%
-0.013%
0.025%
-0.0014%

In table 5, we see a shock occurs when the speed of government expenditure increased one standard
deviation in China, Indonesia, Japan, Malaysia, Singapore, Thailand and USA, it will reduce real money
balance growth rate in Vietnam after 2 years. However, we obtain reverse results in the case of Australia,
Korea, Philippines and Taiwan.
In case of the USA, it brings negative impact on Vietnamese real money balances in the long-term, though
relatively small, but cannot be ignored. It can be categorized as the "beggar-thy-neighbour" effect. According
to Corsetti and Pesenti (2001), international fiscal policy transmits to the term of trade in domestic country.
The US Government's spending increase will push up the US aggregate demand, then cause a higher price in
USA. This will decline Vietnamese real exchange rates, may increase the exported goods of Vietnam. Initially,
the price of tradable goods is increased, then turns to Vietnam's price index. Higher domestic prices will make
the purchasing power of the local currency fall and reduce domestic real incomes. This effect is consistent with
the theory. However, the rest of the countries are not enough evidence to judge.
4.5. The effect of the world fiscal policies on the term of trade in Vietnam
Term of trade is expressed through real effective exchange rate (REER), which consider the relative price
to the trading partners.

Table 6: The GIRFs of the term of trade in Vietnam from its trading partners
Countries

Australia
China
Indonesia
Japan
Korea
Malaysia
Philippines
Singapore
Taiwan
Thailand
USA

Fiscal policy shock from trading partners
(+1σ)
1.16%
0.27%
4.94%
0.48%
0.97%
3.87%
3.05%
5.58%
2.27%
3.15%
2.17%

498

The term of trade growth rate in Vietnam
after
1 year
2 years
-0.012%
-0.002%
0.18%
0.21%
-0.008%
0.003%
0.012%
0.005%
0.003%
-0.007%
0.002%
-0.002%
-0.017%
-0.026%
0.021%
-0.001%
0.038%
0.015%
0.068%
0.033%
0.011%
-0.002%


In table 6, a shock occurs when the speed of government expenditure increased one standard deviation in

Australia, Korea, Malaysia, Philippines, Singapore and USA, it will reduce the term of trade growth rate in
Vietnam after 2 years. However, we obtain reverse results in the case of China, Indonesia, Japan, Taiwan and
Thailand.
In case of Singapore and USA, we can explain that foreign expansionary fiscal policy brings higher
competitiveness of Vietnamese tradable goods than the US and Singapore which causes to reduce the term of
trade in Vietnam. However, the long term influence can have a negative impact on total domestic demand by
pushing domestic prices up and reduce the purchasing power of the local currency and real wages. It will
bring the effect of "beggar-thy-neighbour". Therefore, the results fit theory with the long-term negative effects
of expanding fiscal policy through the reduction of the term of trade, domestic consumption, output, and real
money balances in Vietnam. The remaining countries are not enough evidence to confirm.
4.6. The effect of the world fiscal policies on domestic price in Vietnam
As Corsetti and Pesenti (2001), the domestic price is affected by world fiscal policy position, domestic
monetary policy and government expenditure in the long term. However, this empirical analysis is a
challenge. From 1995 to 2016, Vietnamese price has suffered significant changes due to inflation in the
economy. This estimate is intended to clarify the effect of the price in the fiscal transmission.
Table 7: The GIRFs of domestic price in Vietnam from its trading partners
Countries

Australia
China
Indonesia
Japan
Korea
Malaysia
Philippines
Singapore
Taiwan
Thailand
USA

Fiscal policy shock from trading partners
(+1σ)
1.15%
0.28%
4.54%
0.48%
0.89%
4.13%
2.74%
5.47%
1.58%
2.47%
2.1%

Domestic price growth rate in Vietnam
after
1 year
2 years
-0.011%
-0.019%
0.28%
0.33%
0.04%
0.03%
0.024%
0.018%
-0.028%
-0.031%
0.025%
0.028%

-0.04%
-0.038%
0.01%
0.001%
-0.017%
-0.02%
0.013%
0.02%
0.023%
0.018%

In table 7, a shock occurs when the speed of government expenditure increased one standard deviation in
Australia, Korea, Malaysia, Philippines, and Taiwan, it will reduce the domestic price growth rate in Vietnam
after 2 years. However, we obtain reverse results in the case of China, Indonesia, Japan, Malaysia, Singapore,
Thailand and USA.
When the government expenditure increases in the USA and Singapore, the Vietnam prices increase.
According to Corsetti and Pesenti (2001), this behavior of prices, related to the American government's
spending, shows that trade between Vietnam and the United States are mostly substitute goods. However,
trade between Vietnam and Singapore mainly complementary goods, which increases the production of
Vietnam. The remaining countries are not enough evidence to conclude.
5. Conclusions
According to the experimental results, the permanent shock of expansionary fiscal policy in the United
States will alter the term of trade in Vietnam. Initially, the devaluation of the real exchange rate benefits for
export and make imports more expensive. Therefore, foreign currency cash flow will improve the balance of

499


trade in Vietnam. However, in the long run, the real money balance decreases, due to domestic commodity
price increases, reducing the purchasing power of households. Household consumption accounts for a larger

proportion than exports, and trade between Vietnam and the USA is mainly substitute goods, which makes
Vietnam's output reduce over the long term. In brief, the permanent shock of expansionary fiscal policy in the
US makes household expenditure and output decrease, and domestic price rise, which should be sufficient
evidence for the negative effect of "beggar-thy-neighbour", as indicated by Corsetti and Pesenti (2001). This
result is similar to the Dias et al (2013), research in Brazil and US, and Arin and Koray (2006), done in Canada
and US.
Also, according to the experimental results, the permanent shock of expansionary of government
expenditure in Singapore could make the price of Singapore goods rise higher than Vietnamese goods, which
brings the advantage for export in Vietnam. However, in the long term, it will make domestic goods prices
also climb up, the purchasing power of money rise and household consumption reduce in Vietnam. The
tradable goods between the two countries are complementary, which is the reason for the greater export
volume than the amount of falling household consumption. It makes Vietnam’s production increase. Also,
according to Corsetti and Pesenti (2001), complementary tradable goods will bring benefit for Vietnamese
utility (increased output), that is the effect "prosper-thy-neighbour" (get rich for Vietnam).
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