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Trade Integration of Central and Eastern European Countries: Lessons from a Gravity Model

The aim of the paper is to analyse the factors behind the rapid trade integration of the Central and Eastern European countries with the euro area in the past ten years and to gauge the potential for further integration. We use as benchmark an enhanced gravity model estimated with a large sample of bilateral trade flows across 61 countries since 1980. We show that a careful examination of the fixed effects of the model is crucial for the proper interpretation of the results: simply extracting the predicted values of the regression (“in-sample”) – as commonly done in the literature – leads to distorted results as it fails to take the transition process properly into account. As an alternative, we propose a two-stage “out-of-sample” approach. The results suggest that trade integration between most of the largest Central and Eastern European countries and the euro area is already relatively advanced, while the Baltic countries as well as the South Eastern European countries still have significant scope for integration.

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File URL: https://www.oenb.at/dms/oenb/Publikationen/Volkswirtschaft/Working-Papers/2005/Working-Paper-105/fullversion/wp105_tcm16-36591.pdf
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Paper provided by Oesterreichische Nationalbank (Austrian Central Bank) in its series Working Papers with number 105.

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Length: 43
Date of creation: 25 Oct 2005
Date of revision:
Handle: RePEc:onb:oenbwp:105
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  1. Jarko Fidrmuc & Jan Fidrmuc, 2000. "Disintegration and Trade," William Davidson Institute Working Papers Series 353, William Davidson Institute at the University of Michigan.
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  3. Alejandro Micco & Ernesto H. Stein & Guillermo Luis Ordoñez, 2003. "The Currency Union Effect on Trade: Early Evidence from EMU," Research Department Publications 4339, Inter-American Development Bank, Research Department.
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  12. Andrew K. Rose, 1999. "One Money, One Market: Estimating the Effect of Common Currencies on Trade," NBER Working Papers 7432, National Bureau of Economic Research, Inc.
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  14. Deardoff, A.V., 1995. "Determinants of Bilateral Trade: Does Gravity Work in a Neoclassical World?," Working Papers 382, Research Seminar in International Economics, University of Michigan.
  15. Jarko Fidrmuc, 2004. "The core and periphery of the world economy," The Journal of International Trade & Economic Development, Taylor & Francis Journals, vol. 13(1), pages 89-106.
  16. Peter Egger, . "An Econometric View on the Estimation of Gravity Models and the Calculation of Trade Potentials," WIFO Working Papers 141, WIFO.
  17. James E. Anderson & Eric van Wincoop, 2001. "Gravity with Gravitas: A Solution to the Border Puzzle," NBER Working Papers 8079, National Bureau of Economic Research, Inc.
  18. Maeso-Fernandez, Francisco & Osbat, Chiara & Schnatz, Bernd, 2004. "Towards the estimation of equilibrium exchange rates for CEE acceding countries: methodological issues and a panel cointegration perspective," Working Paper Series 0353, European Central Bank.
  19. Hausman, Jerry A. & Taylor, William E., 1981. "Panel data and unobservable individual effects," Journal of Econometrics, Elsevier, vol. 16(1), pages 155-155, May.
  20. Edward Christie, 2001. "Potential Trade in Southeast Europe: A Gravity Model Approach," wiiw Balkan Observatory Working Papers 11, The Vienna Institute for International Economic Studies, wiiw.
  21. Laszlo Matyas, 1997. "Proper Econometric Specification of the Gravity Model," The World Economy, Wiley Blackwell, vol. 20(3), pages 363-368, 05.
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  24. Peter Egger & Michael Pfaffermayr, 2003. "The proper panel econometric specification of the gravity equation: A three-way model with bilateral interaction effects," Empirical Economics, Springer, vol. 28(3), pages 571-580, July.
  25. Hoekman, Bernard & Djankov, Simeon, 1997. "Determinants of the Export Structure of Countries in Central and Eastern Europe," World Bank Economic Review, World Bank Group, vol. 11(3), pages 471-87, September.
  26. Hamilton, C.B. & Winters, L.A., 1992. "Opening Up International Trade in Eastern Europe," Papers 511, Stockholm - International Economic Studies.
  27. Peter Egger, 2004. "Estimating regional trading bloc effects with panel data," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 140(1), pages 151-166, March.
  28. Francesco Paolo Mongelli & Ettore Dorrucci & Itai Agur, 2005. "What does European institutional integration tell us about trade integration?," Occasional Paper Series 40, European Central Bank.
  29. Jakab, Zoltan M. & Kovacs, Mihaly A. & Oszlay, Andras, 2001. "How Far Has Trade Integration Advanced?: An Analysis of the Actual and Potential Trade of Three Central and Eastern European Countries," Journal of Comparative Economics, Elsevier, vol. 29(2), pages 276-292, June.
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