Trade deficits in the Baltic states: How long will the party last? |
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| Affiliation: | 1. Ricercatore, Dipartimento di Economia, Metodi Quantitivi e Strategie di Impresa, Università degli Studi di Milano Bicocca, Italy;2. Direccion General de Estabilidad Financiera, Direccion de Analisis de Riesgos Macrofinancieros, Banco de Mexico, Av. 5 de Mayo 1-1er Piso Col. Centro, Mexico City, 06059, Mexico;1. Department of Economics, Vienna University of Economics and Business (WU), Welthandelsplatz 1, Vienna 1020, Austria;2. Austrian Institute of Economic Research (WIFO), Austria;3. International Institute of Applied System Analysis (IIASA), Austria;4. Wittgenstein Centre for Demography and Global Human Capital (WIC), Austria;5. Department of Applied Statistics, Johannes Kepler University Linz (JKU), Austria;6. Research Institute for Economics of Inequality (INEQ), Austria;7. Department of Socioeconomics, Vienna University of Economics and Business (WU), Austria |
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| Abstract: | Since their opening up to international capital markets, the economies of Estonia, Latvia and Lithuania have experienced large and persistent capital inflows and trade deficits. This paper investigates whether a calibrated two-sector neoclassical growth model can explain the magnitudes and the timing of the trade flows in the Baltic states. The model is calibrated for each of the three countries, which we simulate as small closed economies that suddenly open up to international trade and capital flows. The results show that the model can account for the observed magnitudes of the trade deficits in the 1995–2004 period. Introducing a real interest rate risk premium in the model increases its explanatory power. The model indicates that trade balances will turn positive in the Baltic states around 2010. |
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