Dealing with an error correction model when trade balances are trend-stationary
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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"Specification Tests in Econometrics,"
185, Massachusetts Institute of Technology (MIT), Department of Economics.
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