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

  • Bems, Rudolfs


    (Stockholm School of Economics)

  • Jönsson, Kristian


    (Research Department, Central Bank of Sweden)

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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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
Contact details of provider: Postal:
Sveriges Riksbank, SE-103 37 Stockholm, Sweden

Phone: 08 - 787 00 00
Fax: 08-21 05 31
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