Abstract

In this work, we assess the existence of an S-Curve pattern in 10 Central and Eastern European countries (CEEC-10) for the relation between the trade balance and the terms of trade. Empirical results support the existence of this curve for Slovenia and Hungary. In the case of Bulgaria, the Czech Republic, and Slovakia the pattern is weaker, but it still prevails, as is the case for an aggregate of the 10 transition countries. We then document this property of business cycles in the dynamic general equilibrium trade model of Backus et al. (1994), calibrated specifically to match the CEEC-10 aggregate economy. Results support the existence of an S-Curve, except when technology shocks are absent and domestic and imported goods are perfect substitutes. Since technological shocks are determinant in explaining the S-Curve pattern and transition countries seem to be experiencing some type of technological shocks, it is not likely that this pattern will fade away in the near future and hence it is important for economic policy to be aware of this phenomenon and its consequences for these countries in terms of real convergence and the timing of euro adoption.

Highlights

  • In this work we empirically assess the existence of a S-Curve relation between the terms of trade and net exports in ten Central and Eastern European Countries (CEEC-10), and analyze our empirical findings, calibrating the dynamic general equilibrium trade model of Backus, Kehoe, and Kydland (1994) to match parameter values for an aggregate (CEEC-10) of the economies at study.Before we characterize a S-Curve pattern, we must first define a related concept - The J-Curve

  • In this work we assess the existence of a S-Curve pattern in ten Central and Eastern European Countries (CEEC-10) for the relation between the trade balance and the terms of trade

  • In this work we empirically assess the existence of a S-Curve relation between the terms of trade and net exports in ten Central and Eastern European Countries (CEEC-10), and analyze our empirical findings, calibrating the dynamic general equilibrium trade model of Backus, Kehoe, and Kydland (1994) to match parameter values for an aggregate (CEEC-10) of the economies at study

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Summary

Introduction

In this work we empirically assess the existence of a S-Curve relation between the terms of trade (or the real exchange rate) and net exports in ten Central and Eastern European Countries (CEEC-10), and analyze our empirical findings, calibrating the dynamic general equilibrium trade model of Backus, Kehoe, and Kydland (1994) to match parameter values for an aggregate (CEEC-10) of the economies at study.Before we characterize a S-Curve pattern, we must first define a related concept - The J-Curve. In this work we empirically assess the existence of a S-Curve relation between the terms of trade (or the real exchange rate) and net exports in ten Central and Eastern European Countries (CEEC-10), and analyze our empirical findings, calibrating the dynamic general equilibrium trade model of Backus, Kehoe, and Kydland (1994) to match parameter values for an aggregate (CEEC-10) of the economies at study. The S-Curve pattern as mentioned in the work of Backus, Kehoe, and Kydland (1994) is a similar definition to the J-Curve, but instead of only studying the existence of negative past and contemporaneous correlations between the terms of trade and net exports, in order for a S-Curve pattern to exist, positive correlations between the two variables must emerge in the future

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