Monetary Policy and Export Dynamics in a Dollarised Economy: Evidence from the Lao PDR

Abstract

This paper examines the impact of monetary policy on export performance in a highly dollarized and resource-reliant economy in the Lao PDR. The aim is to assess the role of key monetary variables, including interest rates, money supply, inflation, exchange rate, international reserves, and FDI, on export dynamics in the short and long run. It employs an ARDL and an ECM using annual time series data from 2000 to 2023.

The long-run results indicate that high loan interest rates and exchange rate depreciation hurt exports, while inflation and the money supply have both positive and mixed effects. In the short run, the ECM exhibits a strong adjustment mechanism towards equilibrium, and the adjustment is particularly sensitive to changes in interest rates, money supply, foreign reserves, inflation, and the exchange rate. FDI has a lagged positive impact, indicating that it plays a role in the development of long-run export capacity. These results highlight the limitations imposed by structural factors, such as underdeveloped financial intermediation and dollarisation, on the effectiveness of traditional monetary policy. Policy prescriptions that emerge include better monetary transmission mechanisms, a well-managed exchange rate regime, and export diversification, as well as the prudent use of reserves.

The study contributes to the relatively few empirical works focused on the Lao PDR and highlights the significance of a contextually determined monetary policy in small, open, and less developed economies. The work also recommends subsequent research to verify an interaction effect, incorporating sector-specific and institutional factors that would further explain the relationship.