Article Global Business Review 19(3) 1–14 © 2018 IMI SAGE Publications sagepub.in/home.nav DOI: 10.1177/0972150917713869 http://journals.sagepub.com/home/gbr 1 Faculty of Economics and Business Management, National University of Laos, NUoL, Vientiane, Laos. 2 Energy and Sustainable Development, Montpellier Business School, France. 3 Faculty of Business and Accountancy, Department of Finance and Banking, University of Malaya, Kuala Lumpur, Malaysia. 4 Institute of Economics and Management, The John Paul II Catholic University of Lublin, Poland. Corresponding author: Phouphet Kyophilavong, Faculty of Economics and Business Management, National University of Laos, POBOX7322, NUoL, Vientiane, Laos. E-mail: Phouphetkyophilavong@gmail.com Investigating the Relationship between Trade Balance and the Exchange Rate: The Case of Laos’ Trade with Thailand Phouphet Kyophilavong 1 Muhammad Shahbaz 2 Ijaz Ur Rehman 3 Bartosz Jó´ zwik 4 Somchith Souksavath 1 Sengchanh Chanthasene 1 Abstract We investigate the nexus between Laos’ trade balance and its real exchange rate with Thailand. We apply the combined cointegration approach and find that the trade balance and the real exchange rate have cointegration. The devaluation of Laos’ Kip improves the trade balance, but there is no evidence of the J-curve phenomenon. Laos’s economic growth causes its trade balance to deteriorate. A rise in Thai income increases the trade balance of Laos. This study presents new insights for policy- makers who seek to sustain trade with Thailand by designing a comprehensive trade policy. Keywords Exchange rate, trade balance, Thailand, Laos Introduction Exchange rates are one of the most important macroeconomic fundamentals in determining a country’s relative level of economic development. Specifically, the exchange rate plays a crucial role in a country’s