REGIONAL COOPERATION AND ECONOMIC INTEGRATION

CEFTA-2006 TRADE COOPERATION
scholars on the possibilities these equations to be specified since those depend on number of
factors, such as: type of the commodity to be traded, the final use, institutional framework,
purpose of modeling, as well as the data availability. Generally the theory suggests two
principle models: model of imperfect and the one of perfect substitutes (Goldstein and
Khan, 1985, p. 1044).
Within this part of the study a selected set of macroeconomic variables is going to be applied
so as to examine their influence on exports and imports. The analysis is to be completed
for the period 1998Q1 to 2008Q3 proceeded by intensive trade and price liberalization. In
addition, the selected timeframe was limited to availability of some variables before the
year 1998, as well as the possible abstraction from the break imposed by 1997 devaluation.
However, the total number of 43 observations allows the specific econometric approach to
be applied without reflecting more significantly on reduction of the degrees of freedom.
The assessment of trade equations is to be made by employing the maximum likelihood
estimator of Johansen so as to estimate a long-run (cointegration) relationship between
exports or imports and the appropriate macroeconomic fundamentals. This method in
particular is suitable for multivariate analysis (can detect more than one cointegrating
vector) and might also account for autocorrelation of the endogenous variables. One of the
most important advantages over the single-equation (Engle – Granger) is the possibility
to include both jointly dependant I(1) and I(0) variables (Harris and Sollis, 2003). The
Johansen method goes through several steps, beginning with the Vector Auto Regression
(VAR) model that is to be transformed into Vector error correction model (VECM).
Thus, the lag length specification of the underlying VAR model has to be made at first.
Furthermore, one should make an appropriate selection of the deterministic components
intended for the long- and short-run relation among the variables. The estimation proceeds
by jointly testing for cointegration and deterministic components. Finally, the restrictions
have to be imposed on the cointegrating vector (s) obtained.
where
Π =
p
∑
i=
1
A i
− I , Γ = − ∑
p
i
A j
j=
i+
1
Within the above equation, y
t
stands for the k-vector of non-stationary I(1) variables
(exports or imports and the respective macroeconomic determinates), x t
indicates
the d-vector of deterministic variables and ε
t
is a vector of innovations. Granger’s
representation theorem states that if the coefficient matrix Π has reduced rank r