Modeling International Trade Flows Between Eastern European Countries and OECD Countries

Christophe Rault, Robert Sova () and Anamaria Sova

No 2851, IZA Discussion Papers from Institute of Labor Economics (IZA)

Abstract: Our paper deals with econometric developments for the estimation of the gravity model which lead to convergent parameter estimates even when a correlation exists between the explanatory variables and the specific unobservable characteristics of each unit. We implement panel data econometric techniques to characterize bilateral trade flows between heterogeneous economies. Our econometric results based on a sample of Eastern European countries (EEC) and OECD countries over a 18 year period highlight the importance of the taking into account of unobservable heterogeneity to obtain a specification in accordance with data properties and unbiased coefficients. The fixed effect factor decomposition (FEVD) technique appears the more suitable for this purpose. We focus more specifically on EEC countries belonging to the last wave of adhesion (Bulgaria and Romania). Since 1990, these countries have moved towards a market economy and more democracy. Our econometric results provide clear evidence in favor of the traditional trade theory based on comparative advantage which suggests a reallocation of labor intensive industry towards EEC generating a complementary specialization.

Keywords: comparative advantage; gravity models; unobserved effects; panel data models; international trade (search for similar items in EconPapers)
JEL-codes: C23 F13 F15 (search for similar items in EconPapers)
Pages: 33 pages
Date: 2007-06
New Economics Papers: this item is included in nep-eec, nep-int and nep-tra
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (10)

Published - published in: Applied Economics Letters, 2009, 16(15), 1547-1554

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