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

  • Bems, Rudolfs

    ()

    (Dept. of Economics, Stockholm School of Economics)

  • Jönsson Hartelius, Kristian

    ()

    (Sveriges Riksbank)

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 1995-2004 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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Paper provided by Stockholm School of Economics in its series SSE/EFI Working Paper Series in Economics and Finance with number 0543.

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Length: 37 pages
Date of creation: 05 Aug 2003
Date of revision: 05 Aug 2003
Publication status: Forthcoming in Review of Economic Dynamics.
Handle: RePEc:hhs:hastef:0543
Contact details of provider: Postal: The Economic Research Institute, Stockholm School of Economics, P.O. Box 6501, 113 83 Stockholm, Sweden
Phone: +46-(0)8-736 90 00
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Web page: http://www.hhs.se/
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