Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/152979
Authors: 
Bussière, Matthieu
Fidrmuc, Jarko
Schnatz, Bernd
Year of Publication: 
2005
Series/Report no.: 
ECB Working Paper 545
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.
Subjects: 
Central and Eastern European Countries
Free Trade Agreement
Gravity Model
panel data
Transition Economies
JEL: 
C23
F15
F14
Document Type: 
Working Paper

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