engleski

A more complex approach to the terms of trade dynamics ; the case of Croatia

Terms of trade ratio became an important explanatory variable in macroeconomics since its improvement can contribute to economic stability and long-term growth through efficient resource allocation and diminution of inflationary pressures. While positive movements in terms of trade could increase domestic purchasing power and real income, significant terms of trade shocks can lead to macroeconomic instability. Terms of trade dynamics also appear to play a role in explaining the turning points in growth accelerations. It means that terms of trade could exhibit both low- and high-frequency fluctuations. The aim of this paper is to explore whether the (income) terms of trade in Croatia follow a non-linear process rather than a linear one, and is the source of that nonlinearity a shift in a regime. Identification is based on Markov switching approach with time-varying transition probabilities and covers quarterly data from 2000 to the end of 2014. We found evidence of nonlinearity in the income terms of trade variable and identified two distinct levels in the data associated with the changes in growth regimes. Changes in terms of trade can occur, last over time as shocks, trend, etc., and have substantial repercussions ; thereby this topic could be interesting in certain aspects of economic theory and empirics for Croatian economic policy.

Croatia, income terms of trade, Markov switching model, nonlinearity, time-varying transition probabilities

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