Dealing with an error correction model when trade balances are trend-stationary

Manuel Cantavella-Jordá ()
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Manuel Cantavella-Jordá: Department of Economics and Instituto de Economía Internacional, Universitat Jaume I, Castellón, Spain

No 2014/04, Working Papers from Economics Department, Universitat Jaume I, Castellón (Spain)

Abstract: The present research shows how one can deal with stationary plus trend trade balance variables in a trade model where the rest of the variables contain a unit root. Data are used in a monthly and a quarterly basis from January 1980 to June 2011 and applied to four countries (Germany, France, Italy and United Kingdom). It is proved that an error correction mechanism suits better in terms of both econometrics and economics when detrending trade balances once they have been verified to have a deterministic trend.

Keywords: Trade model; difference stationary process; trend stationary process; error correction mechanism (search for similar items in EconPapers)
JEL-codes: C32 F10 F31 (search for similar items in EconPapers)
Pages: 9 pages
Date: 2014
New Economics Papers: this item is included in nep-int
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