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Modeling International Trade Flows Between Eastern European Countries and OECD Countries

  • Rault, Christophe

    ()

    (University of Orléans)

  • Sova, Robert

    ()

    (CREST & University of Paris 1 Panthéon-Sorbonne)

  • Sova, Anamaria

    ()

    (E.B.R.C. Bucharest)

Our paper deals with econometric developments for the estimation of the gravity model which lead to convergent parameter estimates even when a correlation exists between the explanatory variables and the specific unobservable characteristics of each unit. We implement panel data econometric techniques to characterize bilateral trade flows between heterogeneous economies. Our econometric results based on a sample of Eastern European countries (EEC) and OECD countries over a 18 year period highlight the importance of the taking into account of unobservable heterogeneity to obtain a specification in accordance with data properties and unbiased coefficients. The fixed effect factor decomposition (FEVD) technique appears the more suitable for this purpose. We focus more specifically on EEC countries belonging to the last wave of adhesion (Bulgaria and Romania). Since 1990, these countries have moved towards a market economy and more democracy. Our econometric results provide clear evidence in favor of the traditional trade theory based on comparative advantage which suggests a reallocation of labor intensive industry towards EEC generating a complementary specialization.

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Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 2851.

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Length: 33 pages
Date of creation: Jun 2007
Date of revision:
Publication status: published in: Applied Economics Letters, 2009, 16(15), 1547-1554
Handle: RePEc:iza:izadps:dp2851
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  1. Tamim Bayoumi & Barry J. Eichengreen, 1995. "Is Regionalism Simply a Diversion? Evidence from the Evolution of the EC and EFTA," IMF Working Papers 95/109, International Monetary Fund.
  2. Aitken, Norman D, 1973. "The Effect of the EEC and EFTA on European Trade: A Temporal Cross-Section Analysis," American Economic Review, American Economic Association, vol. 63(5), pages 881-92, December.
  3. Scott L. Baier & Jeffrey H. Bergstrand, 2005. "Do free trade agreements actually increase members’ international trade?," Working Paper 2005-03, Federal Reserve Bank of Atlanta.
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