Growth and real business cycles in Vietnam and the ASEAN-5. Does the trend shock matter?

We examine Vietnam’s economy together with its closest trade partners. We show that capital accumulation has been the primary growth engine since the start of its transition to the pro-market economy in 1986–the Doi Moi. We also show that the cyclical behavior of its macro-aggregates is similar to the one of its ASEAN-5 peers and other developing countries. We extend the standard small-open-economy RBC model by considering habit persistence and government consumption which allows a close match of the moments of the growth variables. At the business cycle frequency, transitory productivity shocks account for approximately one-half of Vietnam’s output variance, while country-risk and non-transitory productivity shocks account to close to one-fifth each. Regarding Solow residual's volatility, we find that the trend component merely accounts for 12% of this variance in Vietnam, while in Thailand it is only 6%. These findings refute “the cycle is the trend” hypothesis in Aguiar and Gopinath (2007), and align to those in García-Cicco, Pancrazi, and Uribe (2010) and Rhee (2017), in which the stationary component is overwhelmingly dominant. We claim that technological progress and productivity-enhancing measures are fundamental for Vietnam's economy to sustain a high growth.