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

Author

Listed:
  • 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)

Abstract

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.

Suggested Citation

  • Alexandra Ferreira Lopes & Tiago Neves Sequeira, 2014. "The dynamics of the trade balance and the terms of trade in Central and Eastern European countries," Acta Oeconomica, Akadémiai Kiadó, Hungary, vol. 64(1), pages 51-71, March.
  • 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.
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    References listed on IDEAS

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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.
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    More about this item

    Keywords

    Central and Eastern European countries; current account dynamics; terms of trade; S-Curve;

    JEL classification:

    • C68 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computable General Equilibrium Models
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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