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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)

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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Bibliographic 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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Postal: Sveriges Riksbank, SE-103 37 Stockholm, Sweden
Phone: 08 - 787 00 00
Fax: 08-21 05 31
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Keywords: Baltic states; international factor movements; non-traded goods; adjustment costs; dynamic general equilibrium;

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References

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Citations

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Cited by:
  1. Eric Fesselmeyer & Leonard J. Mirman & Marc Santugini, 2012. "Risk Sharing in an Asymmetric Environment," Cahiers de recherche, CIRPEE 1236, CIRPEE.
  2. Rudolfs Bems & Philip Schellekens, 2008. "Macroeconomics of Migration in New Member States," IMF Working Papers, International Monetary Fund 08/264, International Monetary Fund.
  3. Краснопёров, Олег, 2012. "Оценка Производственной Функции В Условиях Неопределённости Динамики Физического Капитала
    [Assessing the production
    ," MPRA Paper 47555, University Library of Munich, Germany.
  4. 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, Elsevier, vol. 21(3), pages 228-240, December.
  5. 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, William Davidson Institute at the University of Michigan wp859, William Davidson Institute at the University of Michigan.
  6. Olivier CARDI & Romain RESTOUT, 2013. "Imperfect Mobility of Labor across Sectors: a Reappraisal of the Balassa-Samuelson Effect," Discussion Papers (IRES - Institut de Recherches Economiques et Sociales), Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES) 2013002, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES).
  7. Kehoe, Timothy J. & Ruhl, Kim J., 2009. "Sudden stops, sectoral reallocations, and the real exchange rate," Journal of Development Economics, Elsevier, Elsevier, vol. 89(2), pages 235-249, July.
  8. 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.
  9. Díaz, Julián P., 2012. "Can enforcement constraints explain the patterns of capital flows after financial liberalizations?," Journal of International Money and Finance, Elsevier, Elsevier, vol. 31(5), pages 1180-1194.
  10. Jönsson, Kristian, 2005. "Real Exchange Rate and Consumption Fluctuations following Trade Liberalization," Working Paper Series, Sveriges Riksbank (Central Bank of Sweden) 187, Sveriges Riksbank (Central Bank of Sweden).
  11. Benczur, Peter & Konya, Istvan, 2013. "Convergence, capital accumulation and the nominal exchange rate," Journal of International Money and Finance, Elsevier, Elsevier, vol. 37(C), pages 260-281.
  12. Julia Lendvai & Werner Roeger, 2010. "External deficits in the Baltics 1995 to 2007: Catching up or imbalances," European Economy - Economic Papers, Directorate General Economic and Monetary Affairs (DG ECFIN), European Commission 398, Directorate General Economic and Monetary Affairs (DG ECFIN), European Commission.
  13. Krasnopjorovs, Olegs, 2013. "Latvijas ekonomikas izaugsmi noteicošie faktori
    [Factors of Economic Growth in Latvia]
    ," MPRA Paper 47550, University Library of Munich, Germany.

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