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The dynamics of the trade balance and the terms of trade in Central and Eastern European countries

Listed author(s):
  • Alexandra Ferreira Lopes

    ()

    (University Institute of Lisbon (ISCTE - IUL), Business School and Business Research Unit, Lisbon, Portugal)

  • Tiago Neves Sequeira

    ()

    (University of Beira Interior (UBI), Department of Management and Economics, Covilhã, Portugal)

In this work, we assess the existence of an S-Curve pattern in 10 Central and Eastern European countries (CEEC-10) for the relation between the trade balance and the terms of trade. Empirical results support the existence of this curve for Slovenia and Hungary. In the case of Bulgaria, the Czech Republic, and Slovakia the pattern is weaker, but it still prevails, as is the case for an aggregate of the 10 transition countries. We then document this property of business cycles in the dynamic general equilibrium trade model of Backus et al. (1994), calibrated specifically to match the CEEC-10 aggregate economy. Results support the existence of an S-Curve, except when technology shocks are absent and domestic and imported goods are perfect substitutes. Since technological shocks are determinant in explaining the S-Curve pattern and transition countries seem to be experiencing some type of technological shocks, it is not likely that this pattern will fade away in the near future and hence it is important for economic policy to be aware of this phenomenon and its consequences for these countries in terms of real convergence and the timing of euro adoption.

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Article provided by Akadémiai Kiadó, Hungary in its journal Acta Oeconomica.

Volume (Year): 64 (2014)
Issue (Month): 1 (March)
Pages: 51-71

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Handle: RePEc:aka:aoecon:v:64:y:2014:i:1:p:51-71
Note: The authors acknowledge the financial support of Fundação para a Ciência e a Tecnologia.
Contact details of provider: Web page: http://www.akkrt.hu

Order Information: Postal: Akadémiai Kiadó Zrt., Prielle K. u. 21-35. Budapest, 1117, Hungary
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  1. Jesmin Rahman, 2008. "Current Account Developments in New Member States of the European Union; Equilibrium, Excess, and EU-Phoria," IMF Working Papers 08/92, International Monetary Fund.
  2. Backus, David K & Kehoe, Patrick J & Kydland, Finn E, 1994. "Dynamics of the Trade Balance and the Terms of Trade: The J-Curve?," American Economic Review, American Economic Association, vol. 84(1), pages 84-103, March.
  3. Herrmann, Sabine & Jochem, Axel, 2005. "Determinants of current account developments in the central and east European EU member states - consequences for the enlargement of the euro area," Discussion Paper Series 1: Economic Studies 2005,32, Deutsche Bundesbank, Research Centre.
  4. Mohsen Bahmani-Oskooee & Ali Kutan & Artatrana Ratha, 2008. "The S-Curve in Emerging Markets," Comparative Economic Studies, Palgrave Macmillan;Association for Comparative Economic Studies, vol. 50(2), pages 341-351, June.
  5. David Backus & Patrick Kehoe & Finn Kydland, 1992. "Dynamics of the trade balance and the terms of trade: the J-curve revisited," Discussion Paper / Institute for Empirical Macroeconomics 65, Federal Reserve Bank of Minneapolis.
  6. Martin Falk, 2008. "Determinants of the Trade Balance in Industrialized Countries," FIW Research Reports series I-013, FIW.
  7. Stephen P. Magee, 1973. "Currency Contracts, Pass-Through, and Devaluation," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 4(1), pages 303-325.
  8. Gábor Kátay & Zoltán Wolf, 2008. "Driving Factors of Growth in Hungary - a Decomposition Exercise," MNB Working Papers 2008/6, Magyar Nemzeti Bank (Central Bank of Hungary).
  9. Douglas Gollin, 2002. "Getting Income Shares Right," Journal of Political Economy, University of Chicago Press, vol. 110(2), pages 458-474, April.
  10. Ellen E. Meade, 1988. "Exchange rates, adjustment, and the J-curve," Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), issue Oct, pages 633-644.
  11. Senhadji, Abdelhak S., 1998. "Dynamics of the trade balance and the terms of trade in LDCs: The S-curve," Journal of International Economics, Elsevier, vol. 46(1), pages 105-131, October.
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