Trade Integration of Central and Eastern European Countries: Lessons from a Gravity Model

41 Pages Posted: 30 Nov 2005

See all articles by Matthieu Bussière

Matthieu Bussière

Banque de France

Jarko Fidrmuc

Zeppelin University Friedrichshafen

Bernd Schnatz

European Central Bank (ECB)

Date Written: November 2005

Abstract

This paper analyses the rapid trade integration of the Central and Eastern European countries (CEEC's) with the euro area in the past ten years and draws implications for further integration. We use as benchmark an enhanced gravity model estimated for a large sample of bilateral trade flows across 61 countries since 1980. We show that a careful examination of the model's fixed effects 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 properly account for the transition process. We therefore propose a two-stage "out-of-sample" approach. The results suggest that trade integration between most of the largest CEECs and the euro area is already relatively well advanced, while some Baltic and South Eastern European countries still have significant scope for trade integration.

Keywords: Gravity Model, Panel Data, Central and Eastern European Countries, Free Trade

JEL Classification: C23, F15, F14

Suggested Citation

Bussiere, Matthieu and Fidrmuc, Jarko and Schnatz, Bernd, Trade Integration of Central and Eastern European Countries: Lessons from a Gravity Model (November 2005). ECB Working Paper No. 545, Available at SSRN: https://ssrn.com/abstract=836424

Matthieu Bussiere (Contact Author)

Banque de France ( email )

Paris
France

Jarko Fidrmuc

Zeppelin University Friedrichshafen ( email )

Am Seemooser Horn 20
Friedrichshafen, 88045
Germany

Bernd Schnatz

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany
069-1344-6517 (Phone)

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