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Trade integration of Central and Eastern European countries: lessons from a gravity model

Bernd Schnatz, Matthieu Bussiere and Jarko Fidrmuc

No 545, Working Paper Series from European Central Bank

Abstract: The aim of the paper is to analyse the factors behind the rapid trade integration of the Central and Eastern European countries with the euro area in the past ten years and to gauge the potential for further integration. We use as benchmark an enhanced gravity model estimated with a large sample of bilateral trade flows across 61 countries since 1980. We show that a careful examination of the fixed effects of the model is crucial for the proper interpretation of the results: simply extracting the predicted values of the regression (“in-sample”) – as commonly done in the literature – leads to distorted results as it fails to take the transition process properly into account. As an alternative, we propose a two-stage “out-of-sample” approach. The results suggest that trade integration between most of the largest Central and Eastern European countries and the euro area is already relatively advanced, while the Baltic countries as well as the South Eastern European countries still have significant scope for integration. JEL Classification: C23, F15, F14

Keywords: Central and Eastern European countries; Free Trade Agreement; gravity model; Panel data; transition economies (search for similar items in EconPapers)
Date: 2005-11
Note: 231394
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (54)

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Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbwps:2005545

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