The Dynamic Relationship of the GDP <i>Per capita</i> Among the Three Baltic States (1990-2021)

Abstract

The geographical situation in Europe of Estonia, Latvia and Lithuania, the Three Baltic States, forms an optimal environment for the study of the economic relationships present among them. The global magnitudes are very similar for the three States, with a little difference in favor of Lithuania regarding population and extension. The three States joined the European Union at the same time, May 1, 2004. A vector autoregressive model, a VAR model, relating the three economies in their temporal evolution is an appropriate model for this study. With the intervention of temporal lags, it is possible to formulate the dynamical relationship present in these economies regarding the percentage growth change in the respective gdp per capita. Our attention is directed to the evolution of this percentage growth rate for the period 1990-2020. The estimated VAR(2) model shows that the percentage change in the gdp per capita of Lithuania is dynamically related to the lagged growth changes of Estonia and Latvia in a direct way, with more complex dynamic relationships regarding the other two States, as explained in the Conclusion. This study is supplemented with the Impulse Response Analysis and the Forecast Error Variance Decomposition to measure the effects of random impulses in the evolution of the percentage growth change in the estimated model.