Abstract

The issue of budget deficits and trade balances has garnered significant interest from scholars and politicians. There are two primary perspectives concerning the correlation between budget and trade deficits. The Keynesian theory posits that the budget deficit is the primary catalyst for the trade imbalance. Conversely, the current account target theory posits that the budget deficit is a consequence of the trade imbalance. The objective of this study is to assess the accuracy of the Keynesian theory and the current account goal hypothesis in the context of Vietnam. This will be achieved by examining the correlation between budget deficits and trade deficits. Utilising data from 1991 to 2022, we employed the Autoregressive Distributed Lag (ARDL) method, Granger causality test, and impulse response analysis to validate that the trade balance has a unidirectional negative effect on the budget deficit. However, we did not find any statistical evidence indicating that the budget deficit has an impact on the trade balance. The findings validate the presence of the Current Account Target Hypothesis and bolster the Neo-classical perspective on the correlation between the trade balance and the budget deficit in Vietnam. Furthermore, we also examine the influence of income, economic openness, and the real exchange rate on the budget deficit. Based on the research findings, we suggest several policy implications to address the trade balance and budget deficit, with the aim of ensuring the long-term stability of the macroeconomy.