Examining Patterns of Bilateral Trade between Australia and Colombia by Using Cointegration Analysis and Error-Correction Models

The main objective of this paper is to understand whether there is a long-term relationship between Australia and Colombian imports by using macroeconomic fundamentals such as the real exchange rate, income, population and openness. We use multivariate cointegration techniques and error correction models along with time-series data (1960-2005). We focus on testing for cointegration in the presence of structural breaks. The findings suggest that the value of Australian imports from Colombia is cointegrated with three economic series: income of both participating countries and the Colombian population. The real value of Colombian imports from Australia is cointegrated with the real bilateral exchange rate and total Colombian world imports. The relationship between the value of bilateral imports and the cointegrated series can be seen as long-running bilateral import elasticities. High coefficients of the cointegrated variables indicate that opportunities exist to improve long-term trade relationships between the two countries.