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Dealing with an error correction model when trade balances are trend-stationary

  • Manuel Cantavella-Jordá

    ()

    (Department of Economics and Instituto de Economía Internacional, Universitat Jaume I, Castellón, Spain)

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    The present research shows how one can deal with stationary plus trend trade balance variables in a trade model where the rest of the variables contain a unit root. Data are used in a monthly and a quarterly basis from January 1980 to June 2011 and applied to four countries (Germany, France, Italy and United Kingdom). It is proved that an error correction mechanism suits better in terms of both econometrics and economics when detrending trade balances once they have been verified to have a deterministic trend.

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    File URL: http://www.doctreballeco.uji.es/wpficheros/Cantavella_04_2014.pdf
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    Paper provided by Economics Department, Universitat Jaume I, Castellón (Spain) in its series Working Papers with number 2014/04.

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    Length: 9 pages
    Date of creation: 2014
    Date of revision:
    Handle: RePEc:jau:wpaper:2014/04
    Contact details of provider: Postal: Campus del Riu Sec, 12071 Castellón
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    Web page: http://www.doctreballeco.uji.es/
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    1. Hausman, Jerry A, 1978. "Specification Tests in Econometrics," Econometrica, Econometric Society, vol. 46(6), pages 1251-71, November.
    2. Goldstein, Morris & Khan, Mohsin S., 1985. "Income and price effects in foreign trade," Handbook of International Economics, in: R. W. Jones & P. B. Kenen (ed.), Handbook of International Economics, edition 1, volume 2, chapter 20, pages 1041-1105 Elsevier.
    3. Johansen, Soren, 1988. "Statistical analysis of cointegration vectors," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 231-254.
    4. Dickey, David A & Fuller, Wayne A, 1981. "Likelihood Ratio Statistics for Autoregressive Time Series with a Unit Root," Econometrica, Econometric Society, vol. 49(4), pages 1057-72, June.
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