Nonlinearities and the Business Cycle in Spanish Imports: A Smooth Transition Regression Approach

Traditional specifications about imports have their foundations on the symmetry of the cycle. However, the wide debate about the asymmetric character of the cycle has aroused much interest in nonlinear dynamics due to the cyclical state of the economy. Economic theory maintains a linear long-run relationship linking imports, GDP and relative prices. This paper analyzes whether short-run deviations from this equilibrium display any kind of nonlinear behavior related to the state of the cycle. Nonlinearities will be captured by an error correction smooth transition regression (STR). Empirical evidence, focused on Spanish imports of goods, supports that short-run deviations of this variable from its linear equilibrium state display a nonlinear behavior. As it is demonstrated, this evolution is caused by the cyclical state of the economy. A previous version of this article has been presented at the 65th International Atlantic Economic Conference (Warsaw, Poland, April 9–12, 2008). The authors would like to thank the conference participants and an anonymous referee for their comments.