THE IMPACT OF THE EXCHANGE RATE UNIFICATION ON TRADE BALANCE IN MYANMAR By WIN, Zar Kyi THESIS Submitted to KDI School of Public Policy and Management In Partial Fulfillment of the Requirements For the Degree of MASTER OF PUBLIC POLICY 2016 THE IMPACT OF THE EXCHANGE RATE UNIFICATION ON TRADE BALANCE IN MYANMAR By WIN, Zar Kyi THESIS Submitted to KDI School of Public Policy and Management In Partial Fulfillment of the Requirements For the Degree of MASTER OF PUBLIC POLICY 2016 Professor Jong-Il YOU THE IMPACT OF THE EXCHANGE RATE UNIFICATION ON TRADE By WIN, Zar Kyi THESIS Submitted to KDI School of Public Policy and Management In Partial Fulfillment of the Requirements For the Degree of MASTER OF PUBLIC POLICY Committee in charge: Professor Jong-Il YOU, Supervisor Professor Chrysostomos TABAKIS Professor Jin Soo LEE Approval as of December, 2016 ABSTRACT This study analyzes the impacts of the exchange rate unification on the trade balance in Myanmar based on Autoregressive Distributed Lag (ARDL) Model. This paper’s main objective is to determine whether the exchange rate has positive or negative effects on the trade balance. This study has discovered that the exchange rate unification has a positive effect on the trade balance in the long run. Additionally, this study finds that Exchange Rate and Foreign Direct Investment have positive effects on the trade balance while GDP growth rate and Inflation has negative impact in the long run. As a policy implication, this study suggests that the government should focus on economic stability and effective monetary policies within the country. Moreover, Myanmar’s new exchange rate system should align with the market speculators without priority of either exporters or importers. Copyright Zar Kyi Win @ 2016 iii ACKNOWLEDGMENTS I would like to thank Buddha, Dhamma, Sanga, and my parents for allowing me to stay in Korea for more than 16 months healthier and happily. I would also like thank all KDI professors and students. This research paper was made possible with the help and support from all you. The space on this paper is not enough; please allow me to express my gratitude to the following contributors to this paper. First and foremost, I would like to thank my supervisor Professor You Jong-Il I for his support, guidance, motivation and patience. He kindly read through my paper and offered invaluable, detailed advice on the structure and the theme of the paper. Second, I would like to thank my second supervisor Professor Tabakis Chrysostomos and all of my academic professors for their effort and good-will in providing me with treasured guidance throughout my graduate studies. I am also thankful to the Government of Myanmar, the Ministry of Planning and finance and KOICA-MDI for allowing me the opportunity to study in Korea. Appreciation is also due to the Central Bank of Myanmar, which provided the necessary data for my paper. Finally, I sincerely thank my mentors Dr. Su Su Myat and Qaisar Khan, my family, friends and colleagues who gave me advice and support, and encouraged me to mentally and physically persist. This research paper would not be possible without all of them. iv TABLE OF CONTENT ABSTRACT .............................................................................................................................................. ii ACKNOWLEDGMENTS ....................................................................................................................... iv CHAPTER I...................................................................................................................................................... 1 1.1 Introduction ......................................................................................................................................... 1 1.2 Background of Exchange Rate System in Myanmar .......................................................................... 1 1.3 Problem Statement .............................................................................................................................. 8 1.4 Research Objectives and Research Questions..................................................................................... 9 1.5 Hypothesis (or Claim) ....................................................................................................................... 10 1.6 Organization of the Paper ................................................................................................................. 10 CHAPTER II .................................................................................................................................................. 11 Literature Review .................................................................................................................................... 11 2.1 Theoretical reviews ........................................................................................................................... 11 2.2 Empirical Reviews ............................................................................................................................ 12 CHAPTER III ................................................................................................................................................. 17 Empirical Analysis of the Exchange Rate Unification ........................................................................... 17 3.1 On the Empirical Analysis of the Exchange Rate Unification .......................................................... 17 3.2 Theoretical Framework ..................................................................................................................... 17 3.3 Empirical strategy ............................................................................................................................. 19 3.3.1 Stationarity Test ............................................................................................................................. 19 3.3.2 Cointegration .................................................................................................................................. 20 3.4 Data and Variable Description .......................................................................................................... 20 3.4.1 Data ................................................................................................................................................ 20 3.4.2 Variable Description ...................................................................................................................... 21 CHAPTER IV ................................................................................................................................................. 22 Results and Discussion ........................................................................................................................... 22 4.1 Unit Root Tests Results .................................................................................................................... 23 4.2 ARDL Bound Testing Approach to Co-integration .......................................................................... 24 4.2.1 ARDL Long-run Coefficients Estimations ................................................................................ 26 4.2.2 ARDL Short Run Coefficients Estimations by using Error Correction Model .......................... 28 4.3 Diagnostics Tests .............................................................................................................................. 31 v CHAPTER V .................................................................................................................................................. 31 Summary, Conclusions and Policy Recommendations ........................................................................... 32 5.1 Summary and Conclusions................................................................................................................ 32 5.2 Policy Recommendations .................................................................................................................. 34 REFERENCES ....................................................................................................................................... 35 LIST OF FIGURES figure 1: Official Exchange Rate and Unofficial Exchange Rate in Myanmar Figure 2: Export and Import of Myanmar( 2012-2015) Figure 3: Trade Balances of Myanmar (In Usd Million) Figure 4: Gdp Growth Rate of Myanmar Figure 5: Akaike Information Criteria (Top 20 Models) LIST OF TABLE Table 1: Below Summarizes The Variable Description and Expected Signs of Their Coefficient Table 2: Summary of Adf Unit Root Test Results Table 3: Ardl Bound Test Results Table 4: Long Run Coefficients Estimation With Lag (1,2,0,2,2) By Ardl Table 5: Short Run Results Estimationby Using Ecm Table 6: Diagnostics Tests Results vi LIST OF ACRONYMS ADF : Augmented Dickey-Fuller ARD : Autoregressive Distributed Lag FESR : Framework for Economic and Social Reforms GDP : Gross Domestic Product IMF : International Monetary Fund LDCs : less developed countries vii SDR : Special Drawing Rights viii CHAPTER I 1.1 Introduction Exchange rate reform is one of the key factors for the economic development (David 2011). The exchange rate arrangement is important for economic growth, trade, investment flows, and inflation and influences the flow of goods and services in a country. The choosing of the exchange rate system in developing countries is essential to strengthen economic fundaments