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

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Author Info
Bems, Rudolfs () (Stockholm School of Economics)
Jönsson, Kristian () (Research Department, Central Bank of Sweden)

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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 1995-2001 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.

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Publisher Info
Paper provided by Sveriges Riksbank (Central Bank of Sweden) in its series Working Paper Series with number 186.

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Length: 43 pages
Date of creation: 01 Jun 2005
Date of revision:
Publication status: Published in Review of Economic Dynamics, 2006, pages 179-209.
Handle: RePEc:hhs:rbnkwp:0186

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Related research
Keywords: Baltic states; international factor movements; non-traded goods; adjustment costs; dynamic general equilibrium;

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Find related papers by JEL classification:
C68 - Mathematical and Quantitative Methods - - Mathematical Methods and Programming - - - Computable General Equilibrium Models
F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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References listed on IDEAS
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Balázs Egert & Kirsten Lommatzsch & Amina Lahrèche-Révil, 2007. "Real Exchange Rates in Small Open OECD and Transition Economies: Comparing Apples with Oranges?," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
    Other versions:
  2. Timothy J. Kehoe & Kim J. Ruhl, 2008. "Sudden Stops, Sectoral Reallocations, and the Real Exchange Rate," NBER Working Papers 14395, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  3. Jönsson, Kristian, 2005. "Real Exchange Rate and Consumption Fluctuations following Trade Liberalization," Working Paper Series 187, Sveriges Riksbank (Central Bank of Sweden). [Downloadable!]
  4. Rudolfs Bems & Philip Schellekens, 2008. "Macroeconomics of Migration in New Member States," IMF Working Papers 08/264, International Monetary Fund. [Downloadable!]
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