The Dynamics of the Trade Balance and the Terms of Trade in Central and Eastern European Countries

In this work we assess the existence of a S-Curve pattern in ten Central and Eastern European Countries (CEEC-10) for the relation between the trade balance and the terms of trade. Empirical results support the existence of this curve for Slovenia, Czech Republic, Hungary, and also for an aggregate of the ten transition countries. In the case of Lithuania, Poland, Romania, and Slovakia the pattern is weaker than in the mentioned countries but it stills prevails. We then document this property of business cycles in the dynamic general equilibrium trade model of Backus, Kehoe, and Kydland (1994) calibrated specifically to match the CEEC-10 aggregate economy. Results support the existence of a S-Curve, except when technology shocks are absent and domestic and imported goods are perfect substitutes.