The Relation Between Government Budget Balance and Macroeconomic Stability: A Case Study in Vietnam

Abstract

The macro-linkage relating to Government budget balance has been concerned by worldwide researchers and whether there is a causal relation between budget balance and macroeconomic stability. Vietnam is one of emerging countries so that the management of economy is always concerned by government. Using the Vector AutoRegression (VAR) approach combined with the Granger causality test, the paper has demonstrated a causal relation between budget balance and macroeconomic stability measured by inflation and economic growth rate in Vietnam from 1995 to 2020. Moreover, the techniques of Impulse Response Function (IRF) analysis and decomposition of variance of variables (FEVD) in the VAR model provide evidence of the budget balance’s impact on inflation and growth rate in the short term. However, the relationship between budget balance and inflation is negative, while the figure for economic development has an opposite trend. Besides, it is indicated that Government budget balance explains 3.95% of inflation and 21.66% of economic development in Vietnam. These effects have fluctuated slightly and extended for more later periods. From that, the study summarizes several policy implications associated with budget balance mainly about cost savings and increasing income of Government. These suggestions might contribute to stabilizing inflation and economic growth in the context that the Government is undertaking a lot of spending tasks to cope with the Covid-19 pandemic.