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Trade Deficits in the Baltic States: How Long Will the Party Last?

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  • Rudolfs Bems

    (Stockholm School of Economics)

  • Kristian Jönsson Hartelius

    (Sveriges Riksbank)

Abstract

Since their opening up to international capital markets, the economies of Estonia, Latvia and Lithuania have experienced large and persistent capital inflows and trade deficits. This paper investigates whether a calibrated two-sector neoclassical growth model can explain the magnitudes and the timing of the trade flows in the Baltic countries. The model is calibrated for each of the three countries, which we simulate as small closed economies that suddenly open up to international trade and capital flows. The results show that the model can account for the observed magnitudes of the trade deficits in the 1995-2004 period. Introducing a real interest rate risk premium in the model increases its explanatory power. The model indicates that trade balances will turn positive in the Baltic states around 2010. (Copyright: Elsevier)

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Bibliographic Info

Article provided by Elsevier for the Society for Economic Dynamics in its journal Review of Economic Dynamics.

Volume (Year): 9 (2006)
Issue (Month): 1 (January)
Pages: 179-209

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Handle: RePEc:red:issued:v:9:y:2006:i:1:p:179-209

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Keywords: Baltic states; International factor movements; Non-traded goods; Adjustment costs; Dynamic general equilibrium;

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Citations

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Cited by:
  1. Jönsson, Kristian, 2005. "Real Exchange Rate and Consumption Fluctuations following Trade Liberalization," Working Paper Series 187, Sveriges Riksbank (Central Bank of Sweden).
  2. Краснопёров, Олег, 2012. "Оценка Производственной Функции В Условиях Неопределённости Динамики Физического Капитала
    [Assessing the production
    ," MPRA Paper 47555, University Library of Munich, Germany.
  3. Balázs Égert & Kirsten Lommatzsch & Amina Lahrèche-Révil, 2007. "Real Exchange Rates in Small Open OECD and Transition Economies: Comparing Apples with Oranges?," William Davidson Institute Working Papers Series wp859, William Davidson Institute at the University of Michigan.
  4. Kónya, István & Benczúr, Péter, 2013. "Kamatfelár, hitelválság és mérlegalkalmazkodás egy kis, nyitott gazdaságban
    [Interest premium, credit crisis and balance-sheet adjustment in a small open economy]
    ," Közgazdasági Szemle (Economic Review - monthly of the Hungarian Academy of Sciences), Közgazdasági Szemle Alapítvány (Economic Review Foundation), vol. 0(9), pages 940-964.
  5. Krasnopjorovs, Olegs, 2013. "Latvijas ekonomikas izaugsmi noteicošie faktori
    [Factors of Economic Growth in Latvia]
    ," MPRA Paper 47550, University Library of Munich, Germany.
  6. Mansoorian, Arman & Mohsin, Mohammed, 2010. "On the employment, investment, and current account effects of trade liberalizations with durability in consumption," The North American Journal of Economics and Finance, Elsevier, vol. 21(3), pages 228-240, December.
  7. Timothy J. Kehoe & Kim J. Ruhl, 2008. "Sudden stops, sectoral reallocations, and the real exchange rate," Staff Report 414, Federal Reserve Bank of Minneapolis.
  8. Olivier Cardi & Romain Restout, 2013. "Imperfect Mobility Of Labor Across Sectors: A Reappraisal Of The Balassa-Samuelson Effect," Working Papers of BETA 2013-04, Bureau d'Economie Théorique et Appliquée, UDS, Strasbourg.
  9. Díaz, Julián P., 2012. "Can enforcement constraints explain the patterns of capital flows after financial liberalizations?," Journal of International Money and Finance, Elsevier, vol. 31(5), pages 1180-1194.
  10. Rudolfs Bems & Philip Schellekens, 2008. "Macroeconomics of Migration in New Member States," IMF Working Papers 08/264, International Monetary Fund.
  11. Julia Lendvai & Werner Roeger, 2010. "External deficits in the Baltics 1995 to 2007: Catching up or imbalances," European Economy - Economic Papers 398, Directorate General Economic and Monetary Affairs (DG ECFIN), European Commission.
  12. Eric Fesselmeyer & Leonard J. Mirman & Marc Santugini, 2012. "Risk Sharing in an Asymmetric Environment," Cahiers de recherche 1236, CIRPEE.
  13. Péter Benczúr & István Kónya, 2007. "Convergence, capital accumulation and the nominal exchange rate," MNB Working Papers 2007/2, Magyar Nemzeti Bank (the central bank of Hungary).

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