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RESEARCH PRODUCT

Long-Run Determinants and Short-Run Dynamics of the Trade Balance in the Eu-15 Countries

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Several studies have analyzed the long-run determinants of current account balances using panel cointegration techniques. In this paper we will study both the long-run determinants and the short-run dynamics of the trade balances in the EU-15 countries. We will analyze each country separately and decompose the aggregate trade balance into the intra balance (trade balance vis-a-vis euro area) and the extra balance (trade balance vis-a-vis the rest of the world). Overall, our results suggest that there are significant differences in the long-run relations across the EU-15 countries which might be overlooked in the panel cointegration studies. In most of the countries there is a long-run cointegration relation between the trade balance, real effective exchange rate, domestic GDP and foreign GDP, but in many cases the coefficient of the trade balance variable is statistically insignificant in the relation. Our results on the short-run dynamics indicate that in general the aggregate trade balance cannot be adjusted by expenditure-switching or expenditure-reducing policies.