Transcript Income and Price Elasticities of Croatian Trade: A Panel Data

Income and Price Elasticities of Croatian Trade:
A Panel Data Approach
Vida Bobić
Introduction

Croatian economy characterized by pronounced external
imbalances, as evidenced by a high current account deficit
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Main cause of current account deficit is the large and growing
merchandise trade gap
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Paper focuses on trade elasticities, primarily those of income and
prices

Sensitivity of trade flows to changes in other factors (exchange
rate, tariffs, FDI) analyzed as well
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Estimation of elasticity coefficients using dynamic panel data
methods and sectoral data
Trade facts
Coverage ratios
Imports and exports
(Share of exports in imports)
21
60
18
57
110
54
12
51
9
48
6
45
3
42
0
39
90
80
%
15
%
billion EUR
100
70
60
50
40
2000
2001
Imports

2002
2003
Exports
2004
2005
2006
2007
Coverage ratio -right
2000
2001
Bulgaria
Latvia
Poland
Slovenia
2002
2003
2004
2005
Czech Republic
Lithuania
Romania
Croatia
Persistent trade deficits throughout the analyzed period
 Comparison with peers – much more pronounced trade imbalace
2006
Estonia
Hungary
Slovakia
2007
Trade modelling
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Many ways to model trade, depending on data availability, level of
aggregation, purpose of model, etc.
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Most models based on imperfect substitutes model

imports and exports are not perfect substitutes for domestic
products
 no specialization of countries
I i  f ( Yi , PImi / Pi )
X i  f (Yi , PExi / Pi )
*

*
Coefficients on the variables of interest can be interpreted as
elasticities
Trade modelling (2)
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Using disaggregate sectoral data and panel methods takes into
account heterogeneity of the data, thus limiting aggregation bias

Use of dynamic methods allows for adjustment dynamics in the data
– although coefficient on lag is of no interest in itself, including it
allows for more consistent estimates of other parameters

Sectoral effects are removed by first-differencing the data
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Estimation of the model by GMM (Arellano and Bond, 1991)

Lagged dependent and endogenous variables in this framework are
instrumented with their lagged levels
Export and Import Functions
I i  f I ( GDP , P Imi , Pi , ER, FDI i ,Tariffs i )
X i  f I ( GDP*, Pi*, PExi , ER, FDI i )
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
Ii
Xi
GDP
GDP*
P Imi
P Exi
Pi
Pi*
ER
Tariffsi
FDIi
i
... imports
... exports
... Croatian GDP
... world GDP
... import prices
... export prices
... price of domestic products in the country
... price of foreign products abroad
... nominal exchange rate
... import tariff rates
... foreign direct investment
... groups of goods 1, 2, ... 31, according to NCEA
Export and Import Functions (2)

Export and import volumes by sector, in tonnes

Croatian and world income – real GDP
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Export and import prices – derived as unit values by sector
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Exchange rate – nominal kuna/euro rate
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FDI – cumulative value of inflows by sector
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Tariff rates (imports) – derived from tariff income data, by sector
Estimation results - Exports
Coefficient
Std. Error
t-Statistic
Probability
GDP world
1.983
0.115
17.295
0.000
Export price
-0.578
0.053
-10.990
0.000
Exchange rate (HRK/EUR)
-0.561
0.415
-1.351
0.179
Cross-section fixed (first differences)
SE of regression
J-statistic
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0.166
19.733
Sargan test p-value
2nd order autocorr. p-value
0.1824
0.50
Income elasticity coefficient close to 2
Relatively low price effect, suggesting low sensitivity of export volume to
changes in price
Exchange rate not significant
Estimation results - Imports
Coefficient
Std. Error
t-Statistic
Probability
GDP_Croatia
2.219
0.071
31.480
0.000
Import price
-0.880
0.040
-22.097
0.000
Tariffs
-0.045
0.005
-8.886
0.000
Exchange rate (HRK/EUR)
-0.926
0.136
-6.797
0.000
Cross-section fixed (first differences)
SE of regression
J-statistic
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21.664
Sargan test p-value
2nd order autocorr. p-value
Somewhat higher income elasticity than for exports
Price effect lower than unity, but higher than for exports


0.139
dependence on imports
Unlike exports, exchange rate significant
Effect of tariffs statistically significant, but very limited
0.3013
0.72
Conclusion
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Income effects dominant and stronger than price effects –
implications of relation between income elasticities for exports
and imports on GDP growth
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Price effects relatively low for both exports and imports
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Negligible effect of tariffs
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Exchange rate effect not as important as expected, and only
significant for imports – appreciation of the kuna in the analyzed
period contributed to some degree to dynamic import growth