Abstract
The empirical literature that relies on conventional cointegration approaches fails to support the existence of cointegration between exports and imports in some countries. This article moves a step ahead and contributes to existing literature to overcome the issue of the unexplained relationship between exports and imports. The research samples consist of quarterly data over the periods 2000q1–2017q2 and 2004q1–2017q2 for the Croatian and the Serbian cases, respectively. The results illustrated that the state-space model with time-varying parameters (T.V.P.) is well suited to establish the relationship between exports and imports when the standard cointegrating relationship does not hold.
Highlights
In the last 25 years Croatia and Serbia have experienced trade and financial liberalisation followed by persistent trade deficit. Haltmaier (2014) found a reduction in global current account deficit after the financial crisis which began in 2007
The empirical literature that relies on conventional cointegration approaches fails to support the existence of cointegration between exports and imports in some countries
The results for the case of Serbia supports the conclusion from the case of Croatia that the conventional cointegration approaches failed to support the existence of cointegration between imports and exports due to sizable, significant and time-varying constant terms
Summary
In the last 25 years Croatia and Serbia have experienced trade and financial liberalisation followed by persistent trade deficit. Haltmaier (2014) found a reduction in global current account deficit after the financial crisis which began in 2007. In the last 25 years Croatia and Serbia have experienced trade and financial liberalisation followed by persistent trade deficit. In case of persistent current account deficit in a country, the macroeconomic policies of the country towards current account adjustment can be considered as ineffective. Persistent current account deficit in a country implies violation of budget constraints increase of foreign debt of the country. Based on Husted (1992), the research examines the violation of international budget constraints over time for the cases of Croatia and Serbia. This article moves a step ahead to explain the relationship between imports and exports in the cases of Croatia and Serbia where linear cointegration between aggregate imports and exports cannot be established. This article follows the state-space model with time-varying parameters (T.V.P.) approach and test the hypothesis of current account sustainability in cases of Croatia and Serbia.
Sign-in/Register to view highlights & summary Sign-in/Register to access full text options 
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a call
