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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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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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  13. 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.
  14. Melanie Leiner-Killinger & Christophe Madaschi & Melanie Ward-Warmedinger, 2005. "What does European institutional integration tell us about trade integration?," Occasional Paper Series 41, European Central Bank.
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  18. Yongcheol Shin & Laura Serlenga, 2004. "Gravity Models of the Intra-EU Trade: Application of the Hausman-Taylor Estimation in Heterogeneous Panels with Common Time-specific Factors," Econometric Society 2004 Far Eastern Meetings 671, Econometric Society.
  19. 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.
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  22. I-Hui Cheng & Howard J. Wall, 2004. "Controlling for heterogeneity in gravity models of trade and integration," Working Papers 1999-010, Federal Reserve Bank of St. Louis.
  23. Peter Egger, . "An Econometric View on the Estimation of Gravity Models and the Calculation of Trade Potentials," WIFO Working Papers 141, WIFO.
  24. James R. Markusen & Anthony J. Venables, 1995. "Multinational Firms and The New Trade Theory," NBER Working Papers 5036, National Bureau of Economic Research, Inc.
  25. Hamid Faruqee, 2004. "Measuring the Trade Effects of EMU," IMF Working Papers 04/154, International Monetary Fund.
  26. Alejandro Micco & Ernesto Stein & Guillermo OrdoÒez, 2003. "The currency union effect on trade: early evidence from EMU," Economic Policy, CEPR;CES;MSH, vol. 18(37), pages 315-356, October.
  27. 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.
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