The dynamics of the trade balance and the terms of trade in Central and Eastern European countries

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.