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The bilateral trade balance of the EU in the presence of structural breaks

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  • Ketenci, Natalya

Abstract

This paper examines the bilateral trade dynamics of the EU with its major trade partners. Previous studies on the bilateral trade dynamics of the EU have been based on estimations without the consideration of the presence of structural breaks. This paper examines the impacts of the real exchange rate and real income on the trade balance of the EU with its major trade partners in the presence of structural breaks. The empirical analysis includes ten major trade partners of the EU for 1980-2012, on a quarterly basis. The paper applies the Bai and Perron (1998) structural break test to determine the presence of structural breaks in series. In order to test the cointegration relationships of series, three different cointegration techniques were applied to the data. First, the Gregory and Hansen (1996) cointegration test was applied, which allows for one structural shift; then, for cases where two breaks were detected, the Hatemi-J (2008) cointegration test was employed. Finally, for countries where more than two breaks are detected, the Maki (2012) cointegration test was applied, which allows for an unknown number of breaks. The parameters of the model were estimated using the Bai and Perron (1998) procedure, which allows for structural breaks, and the OLS procedure without consideration of structural breaks. The paper investigates how the different dynamics of the bilateral trade balance of the EU appear after possible structural breaks consideration.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 54661.

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Date of creation: 2014
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Handle: RePEc:pra:mprapa:54661

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Keywords: Bilateral trade balance; J-curve; cointegration; structural breaks; EU.;

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  1. Bahmani-Oskooee, Mohsen & Ratha, Artatrana, 2008. "Exchange rate sensitivity of US bilateral trade flows," Economic Systems, Elsevier, vol. 32(2), pages 129-141, June.
  2. Mohsen Bahmani-Oskooee & Tatchawan Kantipong, 2001. "Bilateral J-Curve Between Thailand and Her Trading Partners," Journal of Economic Development, Chung-Ang Unviersity, Department of Economics, Chung-Ang Unviersity, Department of Economics, vol. 26(2), pages 107-117, December.
  3. Zivot, Eric & Andrews, Donald W K, 2002. "Further Evidence on the Great Crash, the Oil-Price Shock, and the Unit-Root Hypothesis," Journal of Business & Economic Statistics, American Statistical Association, American Statistical Association, vol. 20(1), pages 25-44, January.
  4. Murad, S. M. Woahid, 2012. "Bilateral Export and Import Demand Functions of Bangladesh: A Cointegration Approach," MPRA Paper 36919, University Library of Munich, Germany.
  5. Jushan Bai & Pierre Perron, 2003. "Computation and analysis of multiple structural change models," Journal of Applied Econometrics, John Wiley & Sons, Ltd., John Wiley & Sons, Ltd., vol. 18(1), pages 1-22.
  6. George Kapetanios, 2005. "Unit-root testing against the alternative hypothesis of up to m structural breaks," Journal of Time Series Analysis, Wiley Blackwell, vol. 26(1), pages 123-133, 01.
  7. Natalya Ketenci & Idil Uz, 2011. "Bilateral and regional trade elasticities of the EU," Empirical Economics, Springer, Springer, vol. 40(3), pages 839-854, May.
  8. Jushan Bai & Pierre Perron, 1998. "Estimating and Testing Linear Models with Multiple Structural Changes," Econometrica, Econometric Society, Econometric Society, vol. 66(1), pages 47-78, January.
  9. Mohsin S. Khan, 1974. "Import and Export Demand in Developing Countries (Demande à l'importation et l'exportation dans les pays en développement) (La demanda de importación y de exportación en los países en des," IMF Staff Papers, Palgrave Macmillan, vol. 21(3), pages 678-693, November.
  10. Perron, P. & Ng, S., 1994. "Useful Modifications to Some Unit Root Tests with Dependent Errors and Their Local Asymptotic Properties," Cahiers de recherche, Universite de Montreal, Departement de sciences economiques 9427, Universite de Montreal, Departement de sciences economiques.
  11. Johansen, Soren, 1988. "Statistical analysis of cointegration vectors," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 12(2-3), pages 231-254.
  12. Bahmani-Oskooee, Mohsen & Niroomand, Farhang, 1998. "Long-run price elasticities and the Marshall-Lerner condition revisited," Economics Letters, Elsevier, Elsevier, vol. 61(1), pages 101-109, October.
  13. Maki, Daiki, 2012. "Tests for cointegration allowing for an unknown number of breaks," Economic Modelling, Elsevier, Elsevier, vol. 29(5), pages 2011-2015.
  14. Graham Elliott & Thomas J. Rothenberg & James H. Stock, 1992. "Efficient Tests for an Autoregressive Unit Root," NBER Technical Working Papers 0130, National Bureau of Economic Research, Inc.
  15. Abdulnasser Hatemi-J, 2008. "Tests for cointegration with two unknown regime shifts with an application to financial market integration," Empirical Economics, Springer, Springer, vol. 35(3), pages 497-505, November.
  16. Mah, Jai Sheen, 1993. "Structural change in import demand behavior: The Korean experience," Journal of Policy Modeling, Elsevier, Elsevier, vol. 15(2), pages 223-227, April.
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