Time-varying parameters approach to sustainability of international trade flows: the case of Croatia and Serbia compared

Abstract

The empirical literature that relies on conventional cointegration approaches fails to support the existence of cointegration between exports and imports in some countries. This article moves a step ahead and contributes to existing literature to overcome the issue of the unexplained relationship between exports and imports. The research samples consist of quarterly data over the periods 2000q1–2017q2 and 2004q1–2017q2 for the Croatian and the Serbian cases, respectively. The results illustrated that the state-space model with time-varying parameters (T.V.P.) is well suited to establish the relationship between exports and imports when the standard cointegrating relationship does not hold.