Trade balance shock and its importance on Gross National Saving Rate and Exchange Rate: A VAR analysis using time series national data for Japan

Authors

  • Amar Singh School of Commerce, Graphic Era Hill University, Clement Town, India
  • Tanuja Gour School of Management, IMS Unison University, Uttarakhand, India.

DOI:

https://doi.org/10.14666/2194-7759-10-1-005

Keywords:

Trade balance, exchange rate, saving rate, VAR model

Abstract

This research focuses on investigating the dynamic network among trade balance (TB), the Gross national saving rate (GNSR), and the exchange rate (ER) in Japan. The study used time series data from 1981 to 2019. The research conducts a vector auto-regression (VAR) to investigate the dynamic relationship in the series. The first step started with a unit root test to check the stationarity. The data series is stationary at first difference.
Further, we employed Johansen co-integrated analysis, Granger causality, an impulse variance analysis followed by variance decomposition. The result shows the unidirectional Granger causal relationship between TB and ER. Its own shock explains that TB’s contribution is 73% and GNSR & ER contributes 25.67 and 0.67 to TB, respectively. The GNSR variance decomposition describes 95.12 variations by its own innovative shock, and ER shows a 52% change in the variable from its own shock. This study establishes that trade balance is significant to exchange rate growth in Japan. This research is original work, and it will contribute the knowledge about the trade balance, gross national saving rate, and exchange rate behaviour & effect to each other. This research focuses on investigating the dynamic network among trade balance (TB), the Gross national saving rate (GNSR), and the exchange rate (ER) in Japan. The study used time series data from 1981 to 2019. The research conducts a vector auto-regression (VAR) to investigate the dynamic relationship in the series. The first step started with a unit root test to check the stationarity. The data series is stationary at first difference.
Further, we employed Johansen co-integrated analysis, Granger causality, an impulse variance analysis followed by variance decomposition. The result shows the unidirectional Granger causal relationship between TB and ER. Its own shock explains that TB’s contribution is 73% and GNSR & ER contributes 25.67 and 0.67 to TB, respectively. The GNSR variance decomposition describes 95.12 variations by its own innovative shock, and ER shows a 52% change in the variable from its own shock. This study establishes that trade balance is significant to exchange rate growth in Japan. This research is original work, and it will contribute the knowledge about the trade balance, gross national saving rate, and exchange rate behaviour & effect to each other. 

Downloads

Download data is not yet available.

Author Biography

Tanuja Gour, School of Management, IMS Unison University, Uttarakhand, India.

Assistant Professor, School of Management

References

Agenor, P.R. & Aizenman, J. (2004). Savings and the terms of trade under borrowing constraints. Journal of International Economics, 63(2), 321-340.

Aminian, N., Fung, K.C., Garcia-Herrero, A., & Lin, C.C. (2012). The political economy of exchange rates: The case of the Japanese Yen. Japan and the World Economy, 24(3), 193-196.

Bahmani-Oskooee, M., Ghodsi, S. H., & Halicioglu, F. (2017). UK trade balance with its trading partners: An asymmetry analysis. Economic Analysis and Policy, 56, 188-199.

Bahmani-Oskooee, M., Harvey, H., & Hegerty, S. W. (2017). The Japanese trade balance and asymmetric effects of yen fluctuations: Evidence using non-linear methods. The Journal of Economic Asymmetries, 15, 56-63.

Chang, X., An, T., Tam, P. S., & Gu, X. (2020). National savings rate and sectoral income distribution: An empirical look at China. China Economic Review, 61, 101263.

Chen, Y., & Liu, D. (2018). Government spending shocks and the real exchange rate in China: Evidence from a sign-restricted VAR model. Economic Modelling, 68, 543-554.

Chiu, Y. B., & Sun, C. H. D. (2016). The role of savings rate in exchange rate and trade imbalance nexus: Cross-countries evidence. Economic Modelling, 52, 1017-1025.

Du, Q., & Wei, S. J. (2016). A Darwinian perspective on “exchange rate undervaluation”. European Economic Review, 83, 111-138.

Eichengreen, B., & Hatase, M. (2007). Can a rapidly growing export-oriented economy exit smoothly from a currency peg? Lessons from Japan’s high-growth era. Explorations in Economic History, 44(3), 501-521.

Evans, M. D. (2017). External balances, trade and financial conditions. Journal of International Economics, 107, 165-184.

Ghosh, A. R., Ostry, J. D., & Qureshi, M. S. (2015). Exchange rate management and crisis susceptibility: A reassessment. IMF Economic Review, 63(1), 238-276.

Habib, M.M., Mileva, E., & Stracca, L. (2017). The real exchange rate and economic growth: Revisiting the case using external instruments. Journal of International Money and Finance, 73, 386-398.

Ikeda, A. (2017). Trade balance volatility and consumption structures in small open economies. Economics Letters, 156, 114-117.

Iwaisako, T., & Nakata, H. (2017). Impact of exchange rate shocks on Japanese exports: Quantitative assessment using a structural VAR model. Journal of the Japanese and International Economies, 46, 1-16.

Jiang, X., Kong, Y., Li, X., Yang, C., & Chen, X. (2019). Re-estimation of China-EU trade balance. China Economic Review, 54, 350-366.

Klein, M. W., & Shambaugh, J. C. (2010). Exchange rate regimes in the modern era. MIT Press.

Ko, J. H., & Murase, K. (2013). Great moderation in the Japanese economy. Japan and the World Economy, 27, 10-24.

Li, K. W. (2017). Redefining Capitalism in Global Economic Development. Academic Press, 273-281.

Nemoto, J., & Goto, M. (2005). Productivity, Efficiency, scale economies and technical change: A new decomposition analysis of TFP applied to the Japanese prefectures. Journal of the Japanese and International Economies, 19(4), 617-634.

Ono, M. (2017). Inflation, expectation, and the real economy in Japan. Journal of the Japanese and International economies, 45, 13-26.

Patureau, L., & Poilly, C. (2019). Reforms and the real exchange rate: The role of pricing-to-market. Journal of International Economics, 119, 150-168.

Rose, A. K. (2011). Exchange rate regimes in the modern era: Fixed, floating, and flaky. Journal of Economic Literature 49(3), 652-672.

Sasaki, Y., & Yoshida, Y. (2018). Decomposition of Japan’s trade balance. International Review of Economics & Finance, 56, 507-537.

Sonaglio, C. M., Campos, A. C., & Braga, M. J. (2016). Effects of interest and exchange rate policies on Brazilian exports. EconomiA, 17(1), 77-95.

Suzuki, Y. (1996). The main issues facing Japan’s economy. Japan and the World Economy, 8(3), 353-360.

Yin, L., & Ma, X. (2018). Causality between oil shocks and exchange rate: a Bayesian, graph-based VAR approach. Physica A: Statistical Mechanics and its Applications, 508, 434-453.

Published

2021-03-25

Issue

Section

Papers