Editorial
The aim of the paper is to analyse the factors behind the rapid trade integration of the Central and Eastern European countries with the euro area in the past ten years and to gauge the potential for further integration. The authors use as benchmark an enhanced gravity model estimated with a large sample of bilateral
trade flows across 61 countries since 1980. They show that a careful examination of the fixed effects of the model is crucial for the proper interpretation of the results: simply extracting the predicted values of the
regression (“in-sample”) – as commonly done in the literature – leads to distorted results as it fails to take the transition process properly into account. As an alternative, the authors propose a two-stage “out-of-sample” approach. The results suggest that trade integration between most of the largest Central and Eastern European countries and the euro area is already relatively advanced, while the Baltic countries as well as the South Eastern European countries still have significant scope for integration.
The paper was also published as ECB WP No. 545