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Empirical Economics

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01-09-2015

An analysis of the trade balance for OECD countries using periodic integration and cointegration

Authors: Tomas del Barrio Castro, Mariam Camarero, Cecilio Tamarit

Published in: Empirical Economics | Issue 2/2015

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Abstract

We analyze imbalances in external accounts that have historically affected most developed countries. The purpose of this study was to shed some light on the sustainability of the current account for a group of OECD countries by merging the popular Husted (Rev Econ Stat 74(1):159–166, 1992) testing procedure with recent econometric analysis dealing with seasonality. A necessary condition for current account sustainability is that exports and imports are cointegrated. Following previous empirical studies (Husted 1992; Arize in Int Rev Econ Financ 11:101–115, 2002; Hamori in Appl Econ Lett 16:1691–1694, 2009), we analyze the long-run relationship linking exports and imports, using quarterly data. In contrast to these studies, we explicitly deal with seasonal effects through the use of periodic integration and cointegration and find a long-run relationship for the majority of the countries.

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See also Kunst (1997) and Osborn et al. (1988) for alternative methods of testing for seasonal unit roots.

In Gersovitz and McKinnon (1978) it is also possible to find arguments in favor of the use Periodic Autoregressive models.

The presence of a level shift recommends the use of unit root tests that explicitly allow for it in the alternative hypothesis. This will be the object of future research.

See Ghysels and Osborn (2001, pp. 153–155) for details about the models nested in (4)/(5)

We have not applied these procedures to our data because these methods perform well in this context for sample sizes of around 75 years in the case of the Johansen tests and 100 years in the case of the Breitung tests.

The role played by intercepts and trends in periodically integrated processes is more complicated than in the case of standard integrated processes. For an in-depth analysis of this, see Paap and Franses (1999)

Following the suggestion of one referee, we have conducted the cointegration analysis for the annual data using the Johansen procedure and Engle and Granger two steps approach. The results are available upon request from the authors. As expected, it is possible to say the aggregation process do not alter the long-run relationships between the analyzed variables.

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Title: An analysis of the trade balance for OECD countries using periodic integration and cointegration
Authors: Tomas del Barrio Castro
Mariam Camarero
Cecilio Tamarit
Publication date: 01-09-2015
Publisher: Springer Berlin Heidelberg
Published in: Empirical Economics / Issue 2/2015
Print ISSN: 0377-7332
Electronic ISSN: 1435-8921
DOI: https://doi.org/10.1007/s00181-014-0874-y

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